This is a tough one for people to follow.
What is the monetary system? Do you know?
It seems like a rather simple question but try to answer it. We presume we know what it is yet the reality is most of us do not have a clue. To be honest, we never really thought about it. This is one of those things we simply take for granted.
Here is another question pertaining to this: why does the US Government threaten to have countries' banks kicked off the SWIFT network? What does that have to do with money, finance, or one's economy?
The SWIFT network, after all, is not a settlement system. In fact, it isn't even a payment system. It is really just a messenger service, relaying text based instructions.
If that is the case, why is it important?
Understanding the monetary system is crucial in this.
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Think About Checks
What is a check? Have you ever used one? Do you know what they do?
Most who are over the age of 40 understand what a check is. Those who are younger might not really be familiar with the concept.
There was a very famous Wendy's commercial in the 1980s that make "Where's the beef" a household phrase.
Updating that for this conversion, with checks, where is the money?
What happens when you pay with a check? The money is taken from your account and sent to the account of the other person. When that individual deposits the check, the bank knows which bank to contact to receive payment. The routing number along with the account tell everyone all that is needed.
Of course, your bank does not send USD (or whatever the currency is) over. Instead, it will net settle with the other bank at day's end using reserves.
So, once again, where is the money? If there is no currency going back and forth, how can there be money used?
This is the answer to the question about the monetary system.
By the way, before anyone goes thinking this is something only in the last few decades, do you know what the #1 form of monetary transactions were in the United States in 1900 (based upon total dollars)? If you guessed checks, you are correct.
In fact, a couple years ago I read that checks still accounts for 16% of the total transactions by dollar amount. That was something that surprised me but when we consider all the business that still write checks, it makes sense.
The Monetary System
So what happens when we combine checks with a messenger service? What does this tell us about the monetary system?
Here is where we see the reality emerge. The monetary system is nothing more than a ledger that is maintained by the banks. They use different messenger services that were developed decades ago (to replace telex) to interact with each other.
Therefore, the monetary system is nothing more than the combination of accounting and communications.
This is how things operate on a global scale. The only difference between the domestic banking system of the United States and the UK versus the international one is who is in control of the ledger. We see many different players (some of the same but at different levels) involved. This is because we have many forms of money being used.
In short, the monetary system, this in turn money, is not what we were taught. Nothing operates like they tell us. All those professor in economics class really didn't know what they were talking about. They were teaching something out of a text that was based upon misguided theories. The banking system truly operates according to a much different mechanism.
With computers being commonplace and our world moving to digital, money is literally just numbers on a screen. Of course, it was always that way. For those inclined, do a search of "ghost money" that dates back to the early modern era.
Nothing More Than Data
The Eurodollar system really took things to a new level. We see there that, due to the hedging using derivatives, the VaR models turned money into data. That is why those who spout off about cryptocurrency not being backed by anything are showing how they really do not understand how the monetary system works. Blockchain is providing for the ability to recreate what is already in place: private digital, reserveless money.
What is different is we are looking at eliminating the banks from the equation. This is not really anything new. Distributed Ledger Technology (DLT) did not emerge with blockchain. The Eurodollar system used this from the start. The Eurodollar quickly faded as the underlying asset as things evolved to simply using ledgers. Vault cash is nothing but a rounding error when it comes to global monetary system.
Understanding the mechanics of the monetary system could give us some insight into understanding how money works. There are a lot of misguided notions out there, especially within cryptocurrency.
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