To explain the monetary system, one should look at how money is born. In almost every country on Earth, one way to generate new money is with the central bank. If the bank feels that increasing the money supply will help us, it can just make more money. It’s that simple. It doesn’t even need to be printed as currency to be born. The next step is commercial banks. These are the banks that you and I use to pay checks and deposit money. All the central bank needs to do is buy some things from these banks using the money they have just made, and now commercial banks have more money.
There is another way to give birth to money. It involves commercial banks. If I go to the bank and deposit $ 500, the bank says “fantastic,” we’ll keep that money for you, and anytime you want, you can withdraw or spend that $ 500. The fact is that legally banks need to reserve only part of the money they are given. This is known as fractional reserve banking. This means that if someone else comes, say, Bob, and he wants to lend money to, say, $ 300, the bank can lend him $ 300. And now, if he wants, he can spend that $ 300. But here’s the thing: Bob can spend $ 300, and I’m $ 500 for $ 800, even though the pot is only $ 500. By the way, you can act as a central bank and independently control the money supply. This is illegal, but you can technically increase the money supply by counterfeiting and reduce the weight by taking away money. For example, burning.
When you burn your own money, you get poorer, but as you reduce the money supply, the power of everyone else’s money increases and they become a little richer. Of course, given the amount of money you could get your hands on and burn, your effect will be completely invisible. In a world where nothing was stable and survival was a challenge, food, clean water, antibiotics and machines of such things would be our economy. If what you use as money has intrinsic value, it is in itself useful, it is known as commodity money. It can also include precious metals such as gold and silver, the rarity of which forces other people to accept goods and services. Now that you can safely store all your goods in one place and you don’t need to protect them or haul them everywhere, representative money often makes more sense. Keep your valuables in a safe place, such as a bank, and take a piece of paper in them, saying “yes, I have these things.” Now you can walk around with simple papers and use them to buy the right things. We are now closer to what we call money today. I say closer because almost all the money we know today represents no real useful commodity anywhere on Earth. This note does not reflect how much food or water, or gold, or spices or video games I have stored in the jar, it’s just money. It’s called a Fiat