Banknotes

Banknotes are the formal name for what many people carry in their wallets – specifically, paper money. Called “Fiat Money”, paper money is essentially valueless, and derives its value from certain outside standards, most notably the government which issued it.

Since paper money does not have any value in and of itself, its value is largely in acting as a kind of enhanced bartering tool. With the government of issue deciding its value, a bank note acts as a promise from one person to another, guaranteed by the state bank of the issuing government.

It works something like this: rather than directly trade a chicken for an hour of technical support, a farmer can evaluate the local market to see how much money his chicken could fetch. Then, he can sell the chicken for the best price.

The technician, instead of finding a farmer who needs support this week, can simply do work for an employer who pays in local currency – after a day of work, the technician can take his wages and purchase the chicken he needs from the local market.

One clear disadvantage of banknotes is that their value is entirely determined by outside factors. Where a chicken is at least a valuable commodity, a banknote is worthless paper if inflation is left unchecked for too long; where a gold coin is negotiable around the world, the bank notes of one country are often worthless in any other, such as trying to spend British Pounds in an establishment that only accepts US dollars.

Compounding this issue is the very real cost of inflation, which over time turns an inexpensive commodity into an expensive one if demand and supply remain the same. When these factors are taken into account, there are many valid critiques of the modern system of money by fiat. Some have even suggested a return to a money standard that of making each bank note redeemable for a known and measured quantity of a precious metal or resource.

On top of this, the individual buying or bartering power of a slip of paper money cheapens the human interaction of the old barter system. For instance, in the modern world the technician buys the chicken he can afford, and the farmer gets the best price for it that he can.

But since they must both go through a middle-man (the market), each loses something in the process. The farmer and the technician could each get a better value by trading directly, but the use of a money system prevents that from being possible, as each must also interact with the money-using public.