THE CREATION OF MONEY.
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Money has held an irresistible fascination for the human race throughout history.
There are obvious reasons for this. In the first place, money is a means of holding wealth and the accumulation of wealth has been a primary objective ever since people found it was preferable to being poor. Secondly, since people are consumers, they find it convenient to use money as a medium of exchange for goods and services.
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These two primary functions of money - a store of wealth and a medium of exchange - serve to satisfy two basic human instinct: to hoard and to acquire.
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Historically, money has taken many different forms; cattle, stones, shells, whale's teeth, tobacco, rum, cigarettes and metal, to name a few. The primary test of money is whether it is acceptable and this, in turn, depends on it's ability to retain value, whether it is convenient to carry, whether it is capable of precisely measuring value and how well it stands up to wear and tear. In the early history of money, metal - especially a precious metal such as gold and silver - fulfilled these requirements admirably.
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The coinage which developed was "Standard", as distinct from today's "token money", that is; the coins were worth their weight in gold and silver.
The value of Gold is $400 dollars per ounce;  Silver is $6.9000 cents per ounce;  Platinum is $860 dollars per ounce.
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But in time, standard coins became too valuable and too much subject to abuse to serve as a medium of exchange. It became popular practice among kings to debase the currency by reducing it's gold and silver content and substituting a less valuable metal, usually copper. The kings loyal subjects played their part by adulterating the coinage through "clipping" and "sweating".
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As gold became scarce and it's value as a metal increased, metal tokens and then printed notes became the universally accepted currency. This development was hastened when governments took over the sole responsibility of minting and printing money.
. What is money?
------------------------------------------- It comes as something of a shock to reflect on the fact that modern money has little or
no intrinsic value.
How can printed notes and coin, backed by no precious metal, be worth anything?
How can printed money be genuine?
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All money is "printed" in the sense that it is created artificially.  What separates good money from bad is not it's form but it's command over goods and services. Money loses value when it's supply is increased at a rate in excess of the capacity of the economy to produce goods and services. The problem is not that money is printed, but that it is printed excessively.
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Bank notes were originally issued to depositors as evidence that gold was held on their behalf in a bank. It became convenient - as well as safe - for the depositor to use the notes to transfer the deposit to another person, for value received. This was an innocent enough practice:
The value of the notes was matched by the value of the precious metal held in banks.
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But not for long.
As banks began to contemplate the reserves of hard currency they held, it was but a short step to lending it out, at a rate interest, by issuing bank notes to borrowers. The meaning of money had undergone a fundamental change.
The value of token money now exceeded standard or real money.
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There was a further stage in the process. Once the issue of currency became the prerogative of governments, banks began to allow depositors and borrowers to use their funds by issuing "bills" drawn on the bank. The cheque book method of settling transactions was underway.
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The test of what constitutes money is purchasing power, that is, it's ability to be exchanged for goods and services. Currency on issue obviously performs this function and so to, do deposits which represent stored up purchasing power.
But not all forms of payment qualify as money. The long established practice of using cheques to settle transactions has implanted the notion, at the popular level, that cheques are money. But a book of cheque forms does not entitled the holder embark on a spending spree.
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A cheque is only good if it is backed by a deposit or an approved loan. The distinction tends to become blurred by the pace of modern commercial practice, but the fact of the matter is that cheques are merely a convenient and safe means of using one's money. The same distinction applies to "card" money. Credit cards to, are a means of exercising purchasing power, but it is the card holder's bank deposit which traditionally has been regarded as the source of his or her spending power.
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So in modern economies, the standard answer to the question "what is money" is currency on issue, notes and coins, and deposits in the financial system.  While currency is still the most visible form of money, it represents only a fraction of the purchasing power available within the economy.
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This is shock number two;
Most of what we understand by money does not exist in any form other than as entries on bank statements or figures in computer printouts.
More than 90 per cent of what we know as money is deposits and a substantial proportion of these have been created by the lending activities of financial institutions.
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But while this the standard answer to the question "what is money" there are alternative ways of measuring purchasing power. By looking at the other side of the balance sheets of financial institutions, we could measure the amount of credit, loans and overdrafts, extended to borrowers.
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