Please note that money in this system is not something that has a value for keeping as an investment. It is simply a medium for trade. Investment is made in productive assets rather than in money.
Since money is created and canceled every time a transaction occurs, the money supply is automatically regulated by the traders in a mutual money system. Costs of accounting system operation are covered by transaction fees, by fixed recurring user fees, or by fees based on account balance. We will see next how this is different from the present situation.
Our present money system and its history
Our present system is not quite so simple as the mutual money described above. We will have to consider its workings and history to understand why we have deficits and fiscal cliffs.
In the present system, the banking industry has taken over the money creation process; seigniorage. Fiat money is the Economicspeak term given to this kind of money. Instead of the trader/borrower being committed directly to the market, they make a commitment to a bank, and traders are required to maintain a positive balance in their bank account, or make a commitment to a bank.
Banks are a special class of trader; the only ones that can create money. Anyone that wants or needs money has to 'borrow' it from a bank that creates it out of nothing (ex nihilo in Economicspeak). In return the bank receives temporary ownership of the asset being purchased. iii
To see how we got where we are. . .
Our banking system is a hold-over from the late Middle Ages when money was based on the value of precious metals, gold and silver. The bankers of the time - the goldsmiths - stored excess gold and silver coins and raw metal for their customers, as well as for themselves, as they had secure vaults. They issued a certificate to the trader who left gold in the vault. Traders found that it was more convenient to keep and trade the certificates rather than take out the metal when a trade was made, so the certificates came to be used as money. The goldsmiths also loaned certificates representing their gold and silver stocks, instead of coins, when traders wanted loans. They charged interest on these loans.
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