Why Bank Money is Debt Money
There was a time when people around the world used money that was known as commodity money. However such a system has completely disappeared and now the kind of money that you can find around you, in banks, issued by banks, is all what you could call debt money. The reason it is known as debt money is that it is issued against a particular debt of the Federal Reserve or one of the banks associated with the Federal Reserve. Even the money that you might have in the privately owned bank represents a debt that the institution or a related financer has.
Why the World Moved on From Commodity Money
Commodity money refers to money that was created with a commodity that equalled the value of the money. In the past gold and silver coins were used. Since the commodity that was used as money had a price associated with it, the perceived value of the money was the perceived value of the gold or silver.
However there were quite a few drawbacks that led to such as system being completely withdrawn. The commodity money was quite heavy,storage was a problem and there was a lot of risk in carrying coins around.Another problem that arose was that a deformed gold or silver coin would not possess the same value as a new coin; hence the value of the commodity with respect to the quality and the weight was always an issue.
This created a lot of discrepancy relating to the value of the currency, its constant evaluation and such issues. A lot of people started shaving gold and silver from coins so that they could accumulate the gold or silver and thus pay a lower amount. Another way of cheating involved storing all coins in a bag and shaking or moving the bag often which would lead to some dust or small particles of gold and silver being formed.
All these issues led to a situation where the calibration of the commodity currency became difficult. People found it very inconvenient to store and exchange. The more money, the bigger the problem was. With the economies across the globe flourishing and the population increasing, there was a demand for a better form of money. People needed something that was not that easy to manipulate and could be uniformly presented for a certain value each time.
The rise in such demands for a better form of money and the overall issues caused by commodity money, led to the development of modern day paper money from banks. This money essentially was debt money!
How did the World move from Commodity to Debt Money?
A lot of merchants, who had a large volume of gold coins, wanted to store the coins securely and thus they kept all coins with the goldsmiths. The goldsmiths, in those days, were known to have the most secure resources. In return for the gold stored with the goldsmiths, the merchants received a paper note stating the amount that was with the goldsmith and other details. This went on to be transformed into the modern day currency.
Over a period of time the goldsmiths transformed into banks with gold from merchants in their lockers. The merchants could use the paper note from the goldsmith in exchange for goods as the paper notes were then presumed to belong to the bearer, it became a transferable currency.
All the money issued by the bank was against the commodities that were stored in the bank. This meant that the bank was issuing these notes to people whom the bank owed the gold that they had stored. In this way the money that was in the bank or was issued by the bank became debt money.
When the goldsmiths started to issue paper notes, they never intended to make money out of the activity. Most goldsmiths were just trying to be diverse in the kind of services they provided and increase the importance of their job. The money making process was a by-product of thegoldsmiths’ activities. Once the concept of money creation by this method was realised, bigger players introduced banking services and the concept of banking came into existence over a period of time.
So, is all Bank Money Debt Money?
The answer to this is yes, to a large extent as most of the money that is given to the banks by the government might be a debt that the government owes to the people or businesses. A lot of people have government bonds and these are the debts of the government. So to a large extent any form of money in the bank can said to be debt money as the money is owed by the government to the people or to institutions.
The big banks might seem to have a lot of money but that does not necessarily make them rich. Since they owe a substantial amount in term of debt notes to people and big companies, their actual value can only be estimated after all the debt notes that they have issued are cleared.
Is Debt Money a Bad thing?
Debt money appears to be something that is unfavorable and unwanted however you need to realise that it is just the way that economics works. Yes, there are definitely certain disadvantages of having money that is created from debt and there were issues with the commodity money as well. Now, with modern day technology a lot of commodities can be standardised, so does that mean that people will move back to commodity money? Probably not!
However, there are great chances that the debt money concept might be tweaked in order to give rise to a system that is universally applicable and acceptable.