Money – The Role of Bank Accounts, Money System, And Forex Markets
Money is money. No matter what it is in the form of – dollars, pounds, credits, traveller’s cheques or even packs of cigarettes – it is essentially money. In its simplest form, money is any verifiable financial document or product that is normally accepted as payment for services and goods and settlement of liabilities, including taxes, in a specific country or socio-cultural context. Although money may be regarded as a commodity in the same way that food is a food or clothes are clothes, money is legally a highly treasured legal tender, issued by governments and private institutions for the payment of debts and accrued interests, and as a highly valuable and highly readable product. This highly tradable product can be represented by various different types of money including banknotes, coins, bank deposit notes, bank membership slips, secured banknotes, negotiable coins, bills, coins of different countries, foreign currency, invoice of exchange and travellers’ cheques.
Cryptocurrencies are no different to other tradable goods in that, like food and clothes, they are purchased and sold on the market and their value is determined by their supply and demand in society. However, unlike other tradable goods and currencies, which are always bought and sold at a pre-agreed cost, cryptosporters typically operate on an exchange based on the principle of relative value. Because no central body governs the supply, level or exchange of currencies, these commodities are subject to highly dynamic and unpredictable market prices, which means that this form of trading is inherently unstable and risky.
The exchange rate of any particular asset is also subject to fundamental factors such as economic growth and inflation. Market participants then use these factors to adjust the supply of money in the market. This results in changes in the present value of future transactions (the price of future purchases). To ensure that the present value of future transactions remains constant and accurate, use-value must be constant as well.
Many critics argue that the contemporary use of money substitutes, including paper notes and digital currencies, are not backed by any asset that can be secure and safe enough to cover future losses. This is because, unlike physical assets, money substitutes do not have any underlying tangible or intangible value that could be converted or pledged as collateral. For example, digital money does not carry any real weight in the real world. It is worth nothing and cannot be converted or bartered for another thing. As such, these are not truly money substitutes that would guarantee the protection of our savings and investments.
As aforementioned, both physical and digital commodities are highly uncertain and intrinsically risky in terms of their present or future values. Because of this, no one can make a guarantee regarding their purchase or sale in a money system. In fact, even if there were, the present value of such commodities would be impossible to determine. For instance, what was the price of oil in 2012? How will we know if the price of oil in twenty years from now is much more than $200 per barrel? There are no fundamentals dictating the future value of money.
As an alternative to this problem, money substitutes can be obtained through a process called fractional reserve banking. In fractional reserve banking, financial institutions use a fraction of their overall assets (usually at a “bignium”) to facilitate all monetary exchanges. This serves two purposes. First, it increases the amount of money in circulation, which causes inflation. Second, it allows banks to create large amounts of money that they are able to sell quickly to consumers in exchange for physical money, creating more inflation.