"From belief!" say I triumphantly.
"What?!" you shout with indignation. Again, with justification.
This is where we turn lead into gold. Alchemy. For real. Like Rumplestilskin, Midas' patron or the proverbial philosopher's stone. Money is money because we believe it is money. We believe it is money because banks can repay their depositors on demand. Banks can repay their depositors on demand because they have the security of real estate for their loans. They have the security of real estate because of legal descriptions recorded at government offices. We have legal descriptions because of survey stakes.
Let's retrace. The bank holds other people's money in exchange for its promise to pay it back sometime, with a bit of interest. Banks get to loan that money to others at greater interest than they pay the depositor. Seems fair. A mere token for their trouble.
Ah, but it does not stop there. Not only does the bank get to loan that money at more interest to one borrower, it gets to do it several times over-however many times the law or prudence allows. This lending is generally all at greater interest than its original borrowing rate.
Where did all this cash come from? Did the bank just make it up?
Well, sort of. But not entirely. It needs survey stakes. It also needs realistic appraisals. It needs both to make sure it gets its money back sometime in the future.
Of course, the bank is its own form of survey stake. People tend to trust it and its promises. That is key-both to the success of the bank and the success of our money system. Because the original depositors are only concerned about getting their money back when they want it back. The seller only cares that his check doesn't bounce upon cashing. The buyer only cares that she gets the loan and the land. The bank mainly cares that it makes enough loans to cover its expenses, pay its owners handsomely and always, always, always, to have the ability to return its depositors' money upon request. The bank cares a lot about that. But, so long as payback is not a problem, it theoretically can make infinite numbers of loans. These loans constitute our money supply.
This means sufficient reserves to meet short-term demands. It means sufficiently valuable loan portfolios to convert into money for meeting intermediate and long-term requirements. It also has come to mean federal insurance and institutional networking. It mainly means an ability to turn its security interests into cash when necessary.
Perhaps most importantly for the world as we know it, it means borrowers are generating the money for repayment, struggling in the world for each dollar, red of tooth and claw.