We have a system called, "money", which is based on money that has never, does not, and will never exist… We have become so divorced from the world that we live in, that most people never ask the simple question, "What is money?" — David Icke
For the purpose of discussing fractional reserve banking, the following is roughly how we need to answer the question, "what is money?" There are plenty of perspectives for a more general answer, but for fractional reserve, we need to choose an appropriate way to view money. The reasons for this view will become clear in parts 3, 4 and 5.
Money is an artificial thing. It doesn’t really exist in reality. You can’t go out and find "money" anywhere in the physical, non-artificial world. That is to say, money doesn’t grow on trees. It comes out of the mind and is a purely artificial concept. It’s only legitimate purpose is to facilitate trade and commerce, or in the words of Aristotle, "Money was intended to be used in exchange."
Wealth on the other hand differs in that you can find "wealth" in the natural world. Wealth is something that you can touch. It has existence on its own with no reliance on the existence of humanity or any "ideas".
Wealth has utility in and of itself, and is not reliant on any external acceptance of it for it to have utility.
The Free Dictionary defines money as (source):
2. The official currency, coins, and negotiable paper notes issued by a government.
It defines wealth as (source):
2. All goods and resources having value in terms of exchange or use.
(I loathe resorting to dictionary definitions, and only point it out as it they are trivial, and trivial information often goes unnoticed.)
Note that money is defined up front as a "medium", while wealth is defined as "material". Money is no more than an abstract representation of wealth.
You can imagine how this is true (that money is an abstract representation of wealth) by writing down on a piece of paper, "The Entire Value of Planet Earth". And there you have all the wealth in the world, well, as you imagined it to be.
Now, write "The Entire Value of Planet Earth" down on a second piece of paper. You now have twice the value. Heck, do it again, but write, "10x The Entire Value of Planet Earth". With that third piece of paper, you now have 12x the value of the entire planet. This is clearly ridiculous. Even if you could redeem that, you could only redeem the first one. You would then have to redeem the others from yourself, but how can you get from yourself that which you already own? This illustrates just how silly money can become when it is "imagined into existence" the way the money from fractional reserve banking "manufactures" or "breeds" money. It does not manufacture wealth. It is only an "idea" that can either be accepted or rejected. My bet is that if you try to cash that on the rest of the world, it will be rejected.
Money Behaves Like a Voucher
Money is only a conceptual/abstract representation of real wealth. We "use" money by "redeeming" it for wealth, much in the same way you would redeem a voucher for a product or service at a store. Merchants issue vouchers that are only good when used at their shops. You cannot use a voucher from Merchant A to redeem the same product from Merchant B. What does this tell us? Money is only as good as the level of its acceptance. If nobody accepted money for their labor, products, or services anymore, all money would be worthless. Well, except perhaps for use as toilet paper…
Hopefully that clears up the difference between the "idea" of money and physical "wealth".
Paper money eventually returns to its intrinsic value – zero. — Voltaire
Part 1 – The Mechanics of Fractional Reserve Banking
Part 2 – What is Money?
Part 4 – Run on the Banks? Or Run on the People?
Part 5 – Compound Interest as Invisible Slavery
Part 6 – Summary & Additional Resources