See, this is an interesting reaction. You don’t trust your money when it’s represented as an entry in a bank’s database, but for some reason you do trust your money when it’s represented as a piece of paper with some writing on it that says the piece of paper is worth so-and-so amount.
That fancy green paper is just an IOU issued by the government that promises that the government will accept that piece of paper in payment of debts you owe the government–such as taxes.
So the real question is, what in the hell is money anyway? Where did such a strange concept come from?
Back in the old days, there was no such thing as money. If you wanted a good, you’d either make it yourself, or find someone who had that good and offer to trade one of your goods for that good. But suppose you’ve got 20 chickens and want an axe, but the guy with the axe doesn’t want any chickens and refuses to trade.
Well, what if you had some other good that he would want? Or, what if you had a good that the axemaker might not want for himself, but was something he knew he could trade easily for goods that he did want? Like, say a pretty shiny yellow rock? And so pretty quickly in a barter economy you get a new concept known as a key good.
This is a good that while not everyone wants or needs, everyone knows that it would be easily traded for any other good you might want. So what sort of goods make ideal key goods? Goods that are portable, divisible, durable, hard to adulterate, and such. In some places cattle are key goods. Other places have used shells, cigarettes, whiskey, cacao beans and so forth. So even if the axemaker doesn’t have any use for cowrie shells, or cacao beans, or whatever the key good is, he knows that if he trades you the axe for cowrie shells, everyone else will be willing to trade him what he wants for his new cowrie shells.
Now, it turns out that one really common key good is small bits of rare metals. These rare metals are useful for making pretty jewelry and such, but the really nice thing about them is that they lots of qualities that make them ideal key goods. Gold can be divided into any size ingot, it lasts forever, it’s very small and dense, it’s hard to fake, and so on. So if you had small ingots of gold, you could travel around the world and find that many people would be willing to take those ingots of gold in trade for their goods.
And of course, those gold ingots can be made in standarized sizes and purities, and stamped by the government, and then we have coins, and we can make silver and copper ingots as well. These metal ingots are intrinsicly valuable, but most people don’t plan to melt the ingots down and create something out of them, they only care about them because other people will freely accept them as barter. And so comes the long-held identification of gold and money, that money somehow IS gold and gold IS money.
But of course, gold coins aren’t money any more than a bottle of whiskey or a cacao bean “is” money.
But suppose you didn’t want to carry around your gold coins. Your neighbor the goldsmith has a safe where he keeps the gold he works on, and guards and so on. So he offers to keep your gold in his safe. And in return he gives you a note saying, “Mindwanderer has 5 gold coins on deposit in my safe”. And any time you want your gold, you go the goldsmith, show him the note, and he returns your gold coins.
But further suppose that instead of a note that specifies “Mindwanderer” we change that reciept to say that anyone who posesses the note can get the gold. This way you can give people gold reciepts instead of actual gold coins, and they treat those pieces of paper as if they were gold coins. The gold coins were treated as money, and now the pieces of paper are treated as money. And note that the goldsmith doesn’t have to keep your particular gold coins on hand…any gold coins or raw gold will do, as long as he has enough to give to anyone who presents a reciept.
But note that the goldsmith can do something interesting. Suppose he takes your gold on deposit and issues you a reciept. Then Erislover comes along as asks the goldsmith for a loan of a gold coin today, which he will repay on thursday. Well, the goldsmith has plenty of gold, so he gives Erislover a gold coin, which Erislover uses to pay for a hamburger, and the hamburger salesman takes the gold coin to the goldsmith and deposits it and gets a receipt for it. Suddenly instead of one receipt for one gold coin, we have two reciepts but only one gold coin. And this is fractional reserve banking. Eventually the goldsmith doesn’t lend gold coins, he merely writes out a note to give to the borrower.
And now we have gold standard currency. Each note or reciept isn’t tied to a particular piece of gold in a particular vault, but rather can be taken to the goldsmith’s shop in return for gold. Or to the government, since the goverment has muscled in on the goldsmith/banker’s litle scheme.
And now, why bother with actually holding hunks of gold that could theoretically be exchanged for those notes? The government can issue notes that are backed by nothing, and they work just like the notes that are backed by gold, because nobody cared about the gold in the first place, all they cared about was that everyone else would take that gold or those gold-backed notes in exchange for goods and services. And so we now have today’s fiat currencies.
And why bother with notes anyway? The notes are simply receipts, there’s no reason those reciepts have to be written of fancy pieces of paper. You get a deposit to your bank and your bank tells you you have $X on account, there’s no need to represent your account with a certain number of fancy papers when it can be represented by a database entry. And so you pay for goods with a credit card, the credit card company gets paid from the bank, you pay the bank with direct deposit from your employer, the employer pays you out of a bank account. And no pieces of paper need change hands, all that changes is the numbers on various computer hard drives. And now we have electronic money.
And it doesn’t matter that the entries in the database don’t represent anything other than entries in a database, because all you care about is that you can exchange those database entries for the goods and services you want, and people accept those database entries in return for their goods and services because all THEY care about is that they can exchange those database entries for the goods and services THEY want. Of course, the problem comes when people stop believing that they really can exchange those database entries for what they want, because then they stop accepting database entries, and then no one wants database entries because no one wants database entries.
Does that answer your question?