I've been studying the nature and value of money for awhile now, and I've only begun to scratch the surface of what the stuff is.  Here in the United States, and perhaps elsewhere, philosophical and economic discussions about money are hopelessly entangled with political philosophy, which makes it all the harder, but I think I have a grasp of what American currency is, and how it got there.

Barter was the first way humans exchanged things they had for things they wanted.  It works well when two people each have something they other wants and they value it equally.  Otherwise, the trades can become inordinately complex, such is the stuff that fiction writers love to illustrate, because wacky hijinks ensue.

That kind of trade can be simplified if there's a medium of exchange which both parties agree has value.  Early media of exchange were things that, if you didn't exchange, you could use yourself, like a sheaf of wheat.  Cigarettes are often used for exchange in prisons, where money isn't permitted, because you can always smoke your extras.

For reasons that are only partially clear, precious metals became preferred medium of exchange, particularly gold.  Economists say that this is because there's a finite supply of it, it's relatively portable, and its purity can be measured, all made it the medium of choice through much of the world.

Gold and other metals were minted into coins which were stamped with proof of their purity.  Because of its portability, it was also easy to steal gold, so the goldsmiths started storing it in secure vaults.  They extended that service to others, effectively creating the first banks by issuing paper receipts for the gold on deposit.

People quickly understood that the bearer of a receipt could redeem it for gold, so those pieces of paper became money, an even more portable medium of exchange.  Each piece of paper was backed by its own gold reserve, that is, the bearer knew he or she could get a certain amount of gold in return for it.

Banks began the practice of lending their own gold in return for interest, but over time they realized that they could get away with more.  After all, people preferred their gold to be safely stored in the vaults, preferring to trade with the slips of paper.  So banks began issuing paper worth more than the gold they had in the vault, a system called fractional reserve banking, because each bank only kept a fraction on hand to satisfy the demands of their withdrawals.

As the banking system codified, the required fraction needed on reserve became law.  The United States seized its citizens' gold in the 1930s, making it illegal to own the stuff, and in 1971 entirely dispensed with the idea that money should be backed with gold.  Instead of representing an amount of gold (or silver), modern money represents a debt.

This is where it gets fuzzy.

The US government issues a bond, and goes to the Federal Reserve Bank (which is actually a private corporation) and exchanges it for Federal Reserve notes.  Those notes enter into circulation.  When they get deposited in a bank, that bank can lend them out, for buying cars and homes and the like.  So in fact, the reserves a bank now keeps are debts owed by the government.

And according to the principle of fractional-reserve banking, that bank can, in effect, lend out about ten dollars for every one it has in its reserves.  Where those extra dollars come from  isn't really discussed, since it's not necessary to have Federal Reserve notes to represent them.  In effect, the bank creates the money on its own books, lends it out, and earns interest on an asset that didn't exist a moment ago.

And the cycle continues.

The laws of physics say you cannot create something out of nothing.  The laws of magic agree, and, I suspect, so do the laws of economics.  We cannot understand our personal, spiritual, or metaphysical relationships with money until we understand how public policy manipulates the stuff.

While I don't see Dirty Money as a political blog, as I noted above, economics and politics are quite entangled with one another, just as money and emotion are thoroughly linked.  This post is just my attempt to present how money functions here and now, to present a baseline for discussion.  Some people like our present system, and others are horrified by it, but that doesn't mean we cannot agree on what it actually is, which is quite puzzling to many of us ordinary folks.