# Where does Money Come From? Author: [[Richard Werner]] Money is one of those technologies most people (including me) take for granted and don't understand at the most basic and fundamental level. What is the history of money, where does it come from, how does it really work, when does money stop working, and how will it change going forward? These are the questions I have been thinking about recently, and this book helps address the questions on origin and function. ## Summary Many assumptions made by the majority of people are based on old notions of money. The predecessors to banks were intermediaries but that is no longer the case, when gold certificates were used as money. Then fractional reserve banking was born through the issuance of gold certificates in excess of gold holdings. There are three types of money, bank notes and coin, central bank reserves and deposits at banks. This third type represents the majority of money and is created and allocated by banks when they extend credit, in effect buying an asset or future income stream. The amount of money the lend out is determined by their confidence in the counterparty's ability to repay. They are incentivized to lend against collateral which can lead to asset bubbles (such as in housing). Bank reserves are needed for payments between banks. Reserves only constrain lending to the extent that a bank needs to ensure it has enough reserves for settlements between banks. Having more reserves does not necessarily lead to more lending although it facilitates it. When banks do not have enough reserves they can borrow from other banks with excess. The central bank can effect these rates of lending by operating in this interbank market. One of the consequences of this credit creation theory of money is that non-inflationary growth can be achieved if money is created for productive uses. The author advocates for window guidance for credit creation, and limiting the use of credit for financial transactions. There was also a discussion around alternative currency systems that was interesting. ## Review The organization of the book could have been better. It jumped from today, to the past, back to today, talked about regulation and government finances and then concluded with how we could improve the system. This was fine but I would prefer: a more linear approach so I don't get lines of though confused; and a higher level view of where we are in our discussion. Most books in general are not very good at guiding the reader and summarizing along the way, but it was pronounced here. Unfortunately there are things I have to unlearn which makes it more difficult to learn and synthesize the information. This inevitably means my summary has some mistakes and I have more reading to do. Overall though I was very happy and would recommend it to those asking themselves the same questions about money as I am. It also raises some interesting questions in my mind about the nature of banking today with the introduction of cryptocurrencies. ## Book Notes #### Chapter 3 - What is money? : - A store of value, a medium of exchange, a unit of account, and a means of settlement. - Classical economic view is that money emerges from barter and is used as a unit of account. It was assumed to be a commodity used for transactions with a neutral, lubricant like role. - This view rests on deductive assumptions about money. Empirical investigations show that money is fundamentally a social relation of credit and debit. - New forms of money beyond precious metal coins were introduced in England in the late 17th century through the monetary use of promissory notes, bond issuance, and certificates of gold deposits (in excess of gold on hand). - Goldsmith deposit receipts were used like money, just like bills of trade in continental Europe. - Goldsmiths started issuing gold certificates to people without gold, in effect giving birth to fractional reserve banking. - Although the goldsmith deposit issuance was technically illegal, it was in demand by society as well as used by the state to finance the civil and French wars. It eventually became accepted practice through law.