Money What it is How it works: Second Edition

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For centuries, money was viewed as tokens with intrinsic value, like gold or silver coins. Paper currencies were often used as substitutes, but they were only accepted on the promise they could be converted on demand into “hard money.”

The era of hard money ended in the mid-20th century. Today every major industrial nation creates its own currency in the form of intrinsically worthless tokens known as fiat money. Most other forms of money are viable only to the extent they can be converted on demand into the government’s fiat money.

Operating in a fractional reserve regime, banks expand the money supply by creating deposits as they issue loans to borrowers. Bank money is now the principal form of money used within the private sector.

Some economists believe fractional reserve banking creates serious problems for the economy in terms of inflation and the misuse of credit. The last essay in this book examines in some detail the basic properties of a fully-backed depository system and proposes a particular implementation.

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