There are many kinds of Money but not all of them are legal tender or currency. Then we have central banks and fiat, gold-standard or debt-Money. How come that all countries have huge debts, but also most households? Who owns that debt? This page describes the basics that can be used for analysis or a good discussion.
I am not an economist. I will use generally accepted terminology as correctly as I can. However, situations are not approached like in mainstream economics, but rather as a kind-of physical system with oddities. For example, there will be no assumptions about the system being stationary or in equilibrium, unless this follows from analysis. Described systems will contain only necessary and sufficient elements, where elements can be anything that is relevant for the system, such as assumptions, conditions and laws of conservation. 1 2
Money can manifest itself in many ways. A promise to work or produced goods. A commodity that is traded for something else. It can be difficult to value, exchange or trust money. In modern societies there is often a specific kind of money that all participants in an economy are legally obliged to accept as payment: legal tender. Each economy has its own legal tender and accounting is done in that economy's currency. When not explicitly stated otherwise, “money” means “legal tender”. 3
In the modern world, there are often two types of legal tender: cash and money on a transaction account.4. With cash, paying means to physically transfer the cash on payment. A transaction account is often referred to as your bank account, checking account, current account or demand deposit account. A transaction account can be used to transfer money to other transaction accounts. In addition to transferring money between transaction accounts, it is also possible to add or remove money from them by exchanging equal amounts of cash.
Any other type of money is still money, but not legal tender. I do not have to accept it as payment. Savings are not legal tender: the bank needs to transfer them to a transaction account first before they an be used in payment. Proof of asset (partial) ownership are also money, but first need to be exchanged for legal tender to use as payment.
Transactional payment rule
An important property of legal tender should be that “having a sufficient amount of legal tender implies a guaranteed ability to meet a financial obligation in a transactional sense”. 5 For example if, at a specific point in time, I own one hundred units or more of legal tender and the price of a chair is one hundred units, this implies that at that specific moment in time, I can buy that chair. This sound rather cumbersome and superfluous, but not all payment systems meet this requirement.
Cash, if it is valid legal tender, meets the transactional payment rule because it is something that physically exists and can change hands on demand.
In general, a payment system includes at least two aspects: cash and money on transaction accounts, each of which are interchangeable. A payment system should also have the transactional payment rule as one of its properties.
The payment system is an essential part of the economy that makes bartering with actual goods obsolete. In the past, bookkeeping ledgers would keep the number of actual good movements to a minimum. These ledgers can be considered the ancient version of a transaction account. If the payment system fails, the economy regresses to physical barter. Even worse: if the ledgers become lost, most people do not know what they own or cannot make claims that they do own. In other words: the economy would come to a standstill.
Keeping track of cash and transaction accounts is easy if al legal tender is counted the same way. Therefore, an economy uses a currency: a basic unit of legal tender. This is the number on a banknote or on your balance overview.
In older societies there was only cash and ledgers. Cash often represented a certain amount of a commodity and could sometimes be exchanged for that. Until a few decades ago, the total worth of a county's currency equalled the amount of gold held by the central bank of that country: the gold standard.6 Even further back, each banknote was a claim on a certain amount of gold from that same central bank. For various and, no doubt, interesting reasons, this was abandoned pretty early in the 20th century.
At present, the total worth of a countries legal tender is just the amount of legal tender expressed in that economy's currency. Period. The value of that currency, however, is expressed relatively to other currencies and perhaps to the amount of a certain commodity, like gold. The price of a currency is whatever people are willing to pay for that currency in terms of commodities or other currencies.
Legal tender goes around in a combination of cash and transaction accounts. But how does legal tender come into existence? This can be done by printing banknotes, adding gold to the central bank's vaults, by upping the amount on transaction accounts or … something else. The combination of money creation and a payment system is the money system.
The current money systems in most economies is a combination of fiat money with transaction account money created as debt. This will be explained in more detail in “Money as debt”.