Money - How Is It Created?

Historically different goods, which are generally accepted and do not spoil easily, have been used for that purpose. The list includes salt, grain, tobacco and cocoa, however metals like gold, silver and copper have emerged as the champions the more 'precious' the less they spoil. Also they are compact and easy to quantify first in ingots and later in coins

So money emerged initially as a consensus of goods that were generally accepted for that function in a society. Later coins were invented to verify a certain amoung of gold/silver/copper by a political authority standardizing the means of exchange.

As storage and transport of large sums in this system is complex and risky, those tasks soon was delegated to specialists like goldsmiths, large traders or organizations, who took the metal coins in custody issuing a receipt, which could be cashed in at a later date or different place. This was the birth of 'paper money' as people used increasingly these IOUs instead of the coins proper.

The issuers of these IOUs however realized, that their customers rarely if ever withdrew the whole amount entrusted to them, so they began issuing more IOUs than they actually had coins in storage. Initially a close kept secret, this fraud was eventually legalized under the name of 'Fractional Banking' and finally institutionalized with the creation of the 'Bank of England' by granting this 'Mother of all Central Banks' the national monopoly on this fraud.

So technically from that time onwards, all banks were bankrupt, yet the system worked, as long as they did not overdo that scam, proving that paper notes alone could successfully function as money, as long as the creation was managed responsibly. Which of course was too hard a test for the greed of the issuing institutions leading to recurring finacial crashes and lastly to the complete and open decoupling of currencies from any illusion of limitation by a physical asset.

With the advent of computers came the next stage in the evolution of money, when paper notes and entries in paper ledgers were substituted by digital storage and transfer. Initially realized only on mainframes and networks of the banking system, the invention of crypto currencies enabled outside actors to offer competing money ecosystems.  

 

What is Money in General? - Joe Brown

What is our Current Money? - PositiveMoney.Org