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Monetary system
The monetary system is the system of exchange of services for some commonly accepted token. Usually, forms of property for currency created by a bank.
Today's reality
Most of what ordinary people and activists believe about the monetary system is wrong.
In reality, banks have special powers to create money by putting funds "on deposit", and to accept currency from others as well, thus having sufficient credit with the central bank to satisfy that central bank's demands for fractional reserves (historically) or capital adequacy (the system more typically used today).
The way that the central bank and accountants assess the value of various kinds of capital determines how much financial capital each is determined to be "worth" for purposes of adequacy assessment. Criticisms of various theories of this tend to say that different kinds are undervalued. For instance, Paul Hawken claims natural capital is undervalued while Amartya Sen says individual capital is. A great many critics of debt argue that undervaluing actual productive capital is inevitable as long as debt interest exists, since it is effectively payment for keeping money liquid. However, in reality, it is the underperforming loans being called in that are causing productive capital to change hands. Only if the new people receiving new loans were doing less social good with them than the people whose loans were being called in, would there be much problem. The real issue is that bankers decided who goes bankrupt.
Under dollar hegemony, the United States Federal Reserve effectively sets the value of all money in the world relative to oil, since only dollars can buy oil - this is changing, see Iran Oil Bourse. This situation has persisted since 1970 when the US violated the Bretton Woods agreement that forced the US to redeem currency in gold. The institutions set up under that agreement (the IMF, BIS and World Bank) all persisted but with new agendas controlled by the US government. Collectively, these institutions decide which countries go bankrupt! A new institution, the WTO, was added to limit the power of rival trade blocs and ensure that there was a means to punish countries which wished to limit access to their resources or market.
History
In a barter system people exchange thing on the basis of the worth of the particular product to each party. However, as the deskilling of the population began to take hold some people began to make only one set of products, this proved to be not very productive, since if you are making airplanes, you won't be able to exchange them for bread, since nobody would grow enough to pay you. Therefore, some communities began to use some commodity that most everybody used (some used gold, some salt (hence the word salary), in Hitchhikers Guide to the Gallaxy a community used leaves).
Then when banks began to open up people would receive a note from the bank stating that they could redeem a certain ammunt of currency from that bank, and some communities began using those notes. Soon bankers have realised that most notes will never be redeemed, and they have began publishing notes without having the currency to back those notes up. Today's monetary system is based on trusting banks to loan only to those who will generate more money, and pulling back other loans from those who fail to do so. If the money supply is always expanding, then, this will result in roughly as many losers as winners. When the money supply is not expanding, however, it results in what is commonly called a depression or recession. This condition is considered to be absolutely artificial by most economists, created only by the refusal to use the powers of a central bank to issue new currency and back up selected loans or institutions.
Alternatives
The list of alternatives to the monetary system:
- gift economy
- barter (not a very good alternative)
