Where money comes from? this is the biggest question unanswered for many people. you might say money comes from job or employment. if thats true, then money comes from businesses? now if we try to understand how businesses operate, which basically provide product or services.. but this doesnt make sense if money comes from businesses, as businessmen/women does not supply money. therefore based from the example above, can we conclude that the root of money does not comes from employment neither businesses?
So where is the money supply? who is responsible coming up with the idea of money? to understand properly, lets look at the history why we need money. during stone age, the tribes people already had 'money' actually, but lets define it as 'money' is actually medium of exchange. which 'money' is capable for someone or between people to exchange goods and services. at ancient times, people use feather, beautiful stones, handcraft, animal, etc etc.. as a form of exchange, during that time barter system is the economy mechanism.
over a period of time, people started to discover metals, that is when metal age has began, the people acquire iron, copper, ore, gold and silver. eventually the society is flourished with things made from metal, jewellery made from previous metal like gold/silver. and we had people specialized in certain expertise, for eg: gold smith. now the gold smith had this safety vault to store the valueables. on the other hand, people has the need to store their jewellery, gold coin, and other previous items as well, but since gold smith is the one had safety vault, the public started to enquiry gold smith if they can rent some space in the safety fault. the gold smith okeyed so everytime people deposit something in the vault, gold smith will issue this gold deposit cheque.
in the open market, people used to trade gold with other necessary stuff. which is either exchange gold with wheat, rice, food, animal, household items, furniture, etc etc.. so gold is a form of money. then eventually people just directly buy things with gold deposit cheque because it is much more conveniet than carrying gold coin. in expectation the business owner able to use the gold deposit cheque either as buy other things or take it to the gold smith and redeem the gold in the safety vault. This is how the "paper money" has begun.
years went by, and the goldsmith made an observation about his safety vault renting business. depositor rarely came in to remove their gold, and never all came in at once. meanwhile the goldsmith had another business, he lends out his gold charging interest. while the convenience of gold deposit cheque(money) came into acceptance by the public, the borrowers when taking loan began asking for gold deposit cheque instead of actual gold. eventually more and more people wanted to borrow gold deposit cheque from goldsmith, this gave the goldsmith even a better idea.
given the fact that no one really came into the vault to claim gold, instead of only issueing gold deposit cheque (issueing loan)backed by his own gold, he started to issue more loans using other people's gold in his vault. the goldsmith thinks as long as the loans is repaid, his depositor would not really notice whats been happening. the point is enable goldsmith yield much more profit compared to previous scenario.
over period of time, goldsmith secretly enjoying a very rewarding income. he become richer than ever before but suspicious grew among the depositor in his safety vault. they worried if goldsmith is spending their deposited money, and depositor got together and threaten to withdraw their gold if goldsmith didnt proof any transparency about his new found 'wealth'
despite what generally people might think, it turned out the situation wasnt that bad. the gold was indeed all available in the goldsmith's safety vault. instead of taking back all the gold due to unpractical reason, the client (depositor) demanded the goldsmith(banker) to cut the mint by paying them share of the interest rate. This is the beginning of banking, banker pay low interest rate to depositor, and banker loans out the gold depositor cheque(money) to others at higher interest rate. the both interest rate difference enough to cover banking operation cost and some profit for goldsmith(banker). the logic of this system is simple & seems logical enough to satisfy the demand for credit.
But today is no longer the same system, the banker does not contempt with the profit as he need to share the interest rate profit with other depositor. at the same time, the europe trade is spreading fast around the globe and creates high demand for credit by the people. another barrier banker faces is he only able to give credits(loan) based on limited amount of gold in his safety vault. then he came up with another idea, since no one ever take a look or threaten to withdraw gold in the safety vault (happened previously), he started to lend out the gold deposit cheque(money) which the gold doesnt need to be in the safety vault.
as long as all the gold deposit cheque holder doesnt come to the vault at the same time to demand real gold, nobody would find out whats banker been doing anyway. this leads to banker become enormously wealthy. over the time, the magnitute of the banker has become suspicious again for the gold depositor, so this lead to some people wanted to exchange their gold deposit cheque(money) back to the gold again. and evetually leads to bank closure because not enough gold for exchange.
but undenialably the large artificial credit(loans) volume created by banker has enormous benefit to the trade accross europe and the world, which is essential to the success of european commercial expansion. therefore this practice of creating money out of thin air is continued, legalized & regulated. banker agrees to abide limit amount of fictional loan money allowed based on certain amount of gold price (not the actual gold). specifically which is at 9 fictional dollar equal to 1 real dollar (9 to 1) this is known as fractional reserve system.
this regulation is enforced by surprised inspection & also arranged just in case of a 'bank run' happened, central bank would support local bank with emergency infusion of gold, but if simultaneuos 'bank run' occurred in many local bank, with the credit bubble burst, the whole banking system would come crashing down. To understand what is fractional reserve banking system, it is a practice expanding the money supply and lend out to the public with additional interest rate. ironically if 2 parties which is an individual and an individual, which one borrows from another, they could not inflate the circulating medium by a loan transaction for the simple reason that the lender could not lend what he didnt have, as banks can do... (reference from : Professor Irving Fisher, economist in his book 100% Money-1935)
for eg: bank A prints and lends out $100, and expecting borrower to return $110 after 1 year, thats 10% interest. indirectly bank just created a mathematically impossible situation. this situation doesnt change if lend to 10 people, or whole country or entire world's population. the only ways for debtors to return $110 of the bank's notes is if the bank prints, and lends, $10 more at 10% interest... the result of creating 100 and demanding 110 in return, is that the collective borrowers of a nation are forever chasing a phantom which can never be caught; the mythical $10 that were never created. The debt in fact is unrepayable.
However, the debt is indeed payable as well, which means through competition with another debtors. the current economy situation is like, you need to compete with another in order to bring back the principal + interest rate money so that you'll be able to pay the loan. eventualy this is what a game is, first of all, what is a game? the game system(any game) must have winner and loser, thats what our current economy is when using monetary system.
what happened to the loser? the only solution is borrow more money, since everyone is subscribed to same set of economic rules, same set of national money. from here the debtors able to starts a business or something and try to pay debt back again. in order for the whole economy in more balanced situation, the loser must target to acquire money from the rich people or rich corporation only, because those are the only one which doenst have debt. unfortunately the situation is kinda opposite as most of the rich acquired their wealth previously through selfish mean.
actually in a more direct way of speaking, national debt would be able to reduced as long as we change from true capitalistic economy to communism way of economy mechanism. however, since the fractional reserve system already in place, we wont be able to fully pay off the debt, its just mathematically impossible as well.
