I am no expert on this topic, but I am interested in learning about money seeing as how I am asked for it when I do the things I like to do. This will be how I see money, what it stands for and current issues with non-gold backed currency.
Money is a token of exchange. Since society functions because people trade their services with one another there is a very natural need for currency. We are able to achieve a much higher standard of living by learning how to do one thing really well and trading with people who do what they do really well compared to trying to do everything ourselves. In an early agricultural society simple barter might work and money wouldn’t really be needed. A farmer could trade food with a blacksmith and they would be able to agree how much food for say a plow is acceptable. However as society advances the number of jobs and products available increases. Someone like a lock smith needs to eat, but maybe a farmer doesn’t need a lock. That lock smith would have to go to the blacksmith, trade his lock for a plow and then go back to the farmer and trade the plow for food. This would take way too much time. Its better to have some kind of token instead of double handling goods. This rudimentary notion of money makes sense to me. Money fills a practical need and ownership of money represents a contribution to the community, provided its ethically obtained.
Since money plays such a central role to society, naturally institutions such as banks arise. It could be risky holding onto large amounts of money yourself, someone might come and rob you for it, if they know you have it. Someone like a banker is needed. So far so good in the development of currency.
The banker since he has accesses to all that money could than use it, as long as he can give people their money back when they ask for it. Since if people can enlist the help of the community to start something like a farm they can give back to the community in a much bigger way than if they had to start the farm themselves. If everyone chips into to help clear land and gives someone the tools they need to start farming this year there will be more food for everyone compared to leaving them to their own devices and having that farm start growing food in five years. Here the concept of a loan is born. It is a good idea as long as there are steps taken to make sure its fair.
People left money with the banker and have a right to accesses it whenever they want (provided no other agreement between them and the banker). If enough people put money in the banker has lots of money he can lend out and still have enough to pay out to anyone who asks for it. The banker can give a portion of this money out to help the community produce more value and collect the money he lent out and then some because of this increase in value. The banker can use this profit for his living, to hire security to keep the money safe, and he could even pay people for leaving money with him. As long as the banker keeps enough money on hand this seems like a good idea.
A problem could arise if someone was able to just make money that didn’t correspond with an increase of value in the community however. This would break the system if it was too prevalent. A person with money not corresponding to actual value would act as a parasite on the system. Something like gold serves as an excellent basis for the token of currency since it can not be made. It can be extracted from the earth only with a lot of labour. The increase in the supply of gold relates to the increase of actual value in society if there are a reasonable number of gold miners. This is why gold was the basis of money for the most part until the 20th century when the world wars happened.
WWI proved to be extremely expensive and was financed heavily through debt. Since Germany decided to neglect the gold standard to pay the extreme war reparations it was forced to pay from the Treaty of Versailles they just printed off money with no regard for value. This caused a cascading effect where various countries had to default on their loans and made them abandon the gold standard also. By the time WWII happened most modern nations no longer had a gold standard on which they based their currency on. This lead to what is known as inflation, which really didn’t exist until the 20th century.
(I am no historian, my source is Capital in the 21 Century and even that I am going off my memory of it. If you know more feel free to share your knowledge in the comments.)
My issues with the current state of money
Without a gold standard there are people (government) who can create money with no corresponding increase of value. This undermines the basis on which money is founded upon. With inflation devaluing currency so rapidly it discourages saving. Why save money if its going to be worth less as time goes on? You need to invest it wisely just to break even.
Another issue is consumer debt. Ideally debt is given to help increase value in the community.Normally if you take a loan you should invest in equipment to start a business. Now it is normal to take on debt to consume value. The banker charges interest on this debt so they have to pay back more money than they were given. I guess inflation helps cover this issue though, but it does go against the foundation of what a loan should be used for.
Lastly there are massive discrepancies between currencies. I was reading that in the Philippines the average worker is lucky to make the equivalent of $200 USD a month. This would be a completely unlivable wage in the US, but they get by there. Yeah the standard of living might not be has high, but a worker has to be able to afford food, shelter and clothing off his wage or he can’t work. If they were able to buy a tangible good, bring it to the US and sell it they would get much better value than if they simply exchanged through the banks. Without a gold standard there loses a sense of consistency between currency. I recently learnt that this is why economists measure purchasing power instead of simple currency exchange when comparing countries. I would have thought that exchange rates should reflect purchasing power myself.
Modern economics is a strange esoteric world. For something so foundational to society as money is I wish for it to be more easily understandable for the average person.