People use money to buy goods and services every day. Buying is an activity of trading. Trading means giving and receiving something to and from someone. Before invention of monetary system, trading would take place through bartering between people to get something for another. Bartering would cause problems due to lack of double coincidences. Money came into existence to solve the problem. People decided to use one thing for money that everyone agreed was valuable to their community. Some people used cattle or animal furs. Other early forms of money included shells and seeds. Afterwards, rare metals such as gold, silver, and the like were used as money. People all over the world made coins out of gold, silver, and other metals. They stamped pictures of kings, queens, gods, or animals on them. People in the present Turkey made the first coins about two to three thousand years ago.
People wanted to keep their coins in a safe place. They left their coins with merchants. A merchant is a trader or someone who runs a store. The merchants gave people receipts. A receipt was a written piece of paper that showed the amount of money someone gave a merchant. People could spend the receipts like money at other stores. These receipts were the fiat paper money initiated from China. In the present days, people all over the world use different kinds of money. The type of money a country uses is called currency. Currency can be coins or paper money called bills. Currency looks different all over the world. People can use both paper money and coins to buy goods. Both kinds of money fit in wallets easily. It is much easier to use paper money and coins than metals. The kind of money people use today facilitates easy trading.
Invention of money leads people to refrain from doing all types of works necessary for the livelihood to live in the society. As a result, people started working within the division of work, specialisation was created. People receive wages in the form of money against their services and engagement. Money is used for trading -- buying goods and services. As such, people need not be jacks of all trades.
In the bartering society, people saved a part of their outputs for future uses. Such type of savings is not required in the monetary society. In this case, people retain a part of their earnings in money as savings. Money acts different functions such as medium of transactions, unit of accounts, store of value etc. Store of value is a saving box operated by banking system.
Banking system is the modern version of token issuer merchants. In the present days, banking system is operated within the framework of fractional monetary system. Banks take deposits from savings of people. A small part of the deposits is retained in central banks. The remainder is used for lending which is deposited again as deposits. In this way of recycling, money generates money in manifolds. Money is a veil of outputs. Money creation by the fractional banking system may be greater than outputs generated in the particular economy, leading money value to decrease.
Price level is a common talk in the days: decrease of money value is known as inflation and its increase as deflation. This is the byproduct of banking system. The monetary system was started by money with gold, silver and the like as underlying materials. Before dominance of a particular currency, metal standard such as gold standard was practiced as monetary system. After the second world war, the system was changed to gold linked dollar standard. Under the system all global currencies are linked to dollar which is linked to gold. The system starting from 1944 continued till 1970s. Afterwards, the global monetary system becomes fiat money standard which is termed as non-standard.
The monetary system is run by the rule books of central banks. The major function of monetary system is to determine the need of money in the economies based on growth prospects. In accordance with the need, money supply is determined by central banks. Money supply does not require backstop of metals, rather accounting entries can create money which is known as money out of thin air.
Central banks work as lenders of last resort, meaning that they are liquidity providers. Banking system like other businesses starts operations with capital which is used for purchases of fixed items such as buildings, furniture and fixture, vehicles and many more. The core business of banks is lending which is supported by deposits. These deposits create money in manifolds under the mechanism of fractional banking system. It is true that the development of modern world is due to money. As usual, there are two sides-- benefits and costs.
Money benefits to some corners in the sense that it loses value over time. Borrowers from banking system need to pay amount in nominal value which is lower compared to real value with the passage of time. Operations of business entities started with capital injected by owners. Capital is an asset to owners, but liability to businesses. Capital is in general a non-refundable fund which is used for purchases of capital goods and a lower part as working fund. Loan is a fund used in business either as working fund or capital fund. The former one is used for short tenure which is refunded from sales revenue. But the later one is used to expand business activities. This is not possible to be paid back out of revenue generated from a year. Year end rent of loan known as interest can be settled out of revenue, principal amount is paid from depreciation charged as expenses and profit accumulated without distribution of dividends. But repayments of principal depend on affordable size of installment. Otherwise, repayments face defaults. The defaults faced by banks are supported through last resorts which, as backstops, extend different policies to repair the defaults.
Regular income earned by individuals is used to maintain livelihood, with a little portion as savings. The savings are not so high to convert into materialised assets. Small pies are generally accumulated in the banking system. Different employment benefits are accumulated in the same ways for payments in future dates. The savings accumulated with interest can do nothing to support the beneficiaries in future periods due to nominal value of money deteriorated overtime by inflation. On the other hand, people can capitalise future income by loan funds from banks. The fund is used for big ticket purchases like homes, durables, etc. People with fixed income and self-employment categories can repay the loans out of income overtime. No savings are required to be accumulated, rather banking system can provide now what is expected to be generated in future out of current savings. In this way, people with opportunity can move by capitalisation of future income. The present system run by loan money cannot have all people onboard, but deposits of major people are eaten up by price level hike. This cannot support the beneficiaries in future. As such, shouldn't we need a monetary system supporting savings rather than encouraging borrowings?