What is Money?

Money fuels global debates on living costs, fairness across generations, budget cuts, and funding climate transitions. Yet, confusion reigns in discussions of money, banking, markets, taxes, and spending, even in expert publications and central bank reports. This muddle stems from myths about money's creation, nature, and role. Accurate understanding empowers everyone to scrutinize institutions and policies.

Historical Shift to Modern Money

Early money forms included notes, coins, and oddities like shells or rum. But physical cash now plays a minor role. Since the 1970s end of gold-backed systems, electronic payments dominate. A 19th-century insight foresaw this: banks "net" claims daily, canceling offsets and settling only differences—once in gold, now electronically.

Bank money overwhelmingly prevails. Private banks create most of it through lending, not from existing deposits.

How Money Is Created

When a bank issues a loan, it simultaneously creates the borrower's debt (bank asset) and deposit (bank liability). This expands money "from thin air."

Limits exist: viable borrowers, regulations, and sufficient central bank reserves (IOUs for inter-bank settlement, not public money). Reserves enable payments but are far smaller than total bank money, often netted.

Governments in currency-sovereign nations spend via this banking system, creating money first—then taxing or borrowing. They face inflation risks, not strict budgets. But they lack monopoly; private banks drive most creation. No separate "fiat" money exists apart from bank deposits (or reserves, which aren't spendable by non-banks).

Bitcoin: a digital alternative ?

Bitcoin emerges as a decentralized counterpart. Unlike bank-ledger money, it operates on a public blockchain, created through mining (solving computational puzzles) with a fixed 21-million cap. It functions as digital, transferable "property"—scarce, borderless, and resistant to inflation or seizure. Users hold it directly via wallets, bypassing banks. While volatile, it challenges central control, enabling peer-to-peer value transfer without intermediaries.

Bitcoin is digital bearer money for those who choose to use it, but not (yet) "money" in the official, stable, universally accepted sense. It’s a parallel monetary experiment: scarce, portable, censorship-resistant, that works outside the banking system

Money's True Nature

Common views imagine money as durable, token-like, and movable—like coins in a piggy bank or heist movies. Bank facades reinforce this.

Reality differs: Bank money is contractual ledger entries. "Transfers" erase balances in one bank and recreate them in another—with new terms, risks, and parties. Taxes destroy money on payment; spending recreates it later.

This ledger money isn't traded on markets (forex uses reserves bank-to-bank). It stays within one nation's system, can't be "held" abroad, and theft involves flawed instructions, not physical removal. Banks often reverse fraud.