Money 101: What is Money?

To understand money, you need to understand that there are five main types of money, each which evolved from the latter:

1. Commodity money

A physical thing (that cannot be duplicated) is the money, such as precious metals, silk, spices, deer skins, etc. Of these things, gold has great historical usage as money (since ancient times) because:

• It is a cannot be duplicated
• It is infinitely divisible
• It does not corrode or spoil over time; is not easily destroyed
• Aesthetic value
• Commodity money automatically creates price stability through the forces of the free market (supply and demand). As a test of this, you should check out how much you could buy (relative to technology/living conditions at the time) with an ounce of gold at any point in history and compare it to today – it's trade value is largely unchanged throughout the centuries. Alan Greespan has been quoted as saying “Gold is the ultimate form of payment in this world.”

2. Receipt money

This is a piece of paper that is a receipt for commodity money, and is used as if it were the commodity money itself: i.e. it's 100% backed by commodity money. Back in the early 1900s, the US Dollar was receipt money for gold, which meant that it was used “as” gold. You could exchange your dollars for a fixed amount of gold, and vice versa.

3. Fractional money

This is the same thing as receipt money, except that the issuing bank does not have enough commodity money to back the receipts. Fractional money is a classic banking scandal that has occurred again and again and again throughout history. Here's how it works:

• People deposit their commodity money into a bank
• People exchange largely with the receipts for this commodity money rather than the commodity money itself
• The bank realizes that it can just print new receipts for commodity money that it doesn't have, and either loan it out (and collect interest in commodity money), or just spend it directly. [This is what causes the inflation – because there are now more receipts for commodities (that don't exist!) chasing few other goods – it's just a supply and demand equation, econ 101]
• When people finally realize that the bank has done this (trust is lost), then they rush to exchange their receipt for the commodity money – but alas, there are too many receipts out there, and not enough commodity money – so either (a) only a fraction of the people get their commodity money back or (b) each person only gets a fraction of their commodity money back[this is where deflation occurs, because suddenly those who have kept their commodity money have vastly more purchasing power – again, supply and demand]

4. Fiat money

This is just like infinitely fractional money: they remove all commodity backing – therefore, the only backing is by fiat (latin for “let it be done”), which means by force. Under this scenario, the government can then print as much “money” as they wish, increasing the supply and therefore causing inflation. If trust is lost, however, there is no commodity backing, so rather than a deflation like in (3), the value of the fiat money quickly dives towards to zero (hyperinflation). This has occurred many times throughout history, such as Germany after WWI and, more recently, Argentina.

5. Debt-Money (Fiat with Central Banking)

I'm hesitant to put this as a fifth type of money, becase it's really not. Once you have fiat money, the government can design any financial system that they wish. However, it's important to understand debt-backed currencies since they're so different from traditional fiat money.

Traditional fiat money can be printed at will by a government. However, under central banking, a specific bank (in the case of the US, it's the Federal Reserve) colludes with government and is given the sole role of printing their fiat money. The government actually borrows money from this monopoly, but rather than borrowing deposit money they borrow newly printed money (or its electronic equivalent, a new checking account). Banks are also allowed to borrow newly printed money from this central bank. However, for every new unit of currency printed, a debt obligation (bond) is held by the central bank for the same amount of dollars plus interest.

Think about this for a moment. Every dollar ever printed has a interest bearing bond backing it up at the Fed. However, there arn't enough dollars to ever pay back all the bonds because the Fed only printed enough for the principle. Therefore, the amount of debt in the system is always larger than the actual Federal Reserve Notes (dollars). Such a system quickly causes an explosion of increasing indebtedness.

We are a nation that is deeply financially indebted to the Fed and its colluding member banks, and already our entire income tax just goes to pay the interest on the money they printed! If you would like more information on this system, please watch the excellent video "debt money": http://www.youtube.com/watch?v=cy-fD78zyvI

Also, vote Ron Paul for President since he's the only candidate who is against this system of theft.