Money is a store of value so that we don't end up trading chickens for enterprise resource planning software.  It has no inherent value, it only has value because we all agree that it has value.  The amount of money has to roughly match the amount of stuff that exist to trade for it.  If there's too much money, all money becomes worth less stuff.  We call this inflation.  If the amount of money doesn't keep up with the amount of stuff, then all the money is worth more stuff.  We call this deflation.

We have two kinds of money:  the kind that has the watermark on it, and debt.

People do all kinds of things with their watermarked money.  They spend it, they give it to other people, they flash it around and even throw it in the middle of the street sometimes.  But between the time you first get it and the time you throw it in the street, you have to put it somewhere.  Some people put their money in their mattress, like this:

This method of storage was especially popular in the 1930's.  But today, most people give their money to a bank to hold.  Contrary to popular belief, banks do not loan out the money you give them to hold.  This is a false idea propagated by such imaginary stories as "It's a Wonderful Life". 

What we have instead is a system called fractional reserve banking.  We allow banks to magically conjure "money" to lend out of thin air, in exchange for an I.O.U. from you.

As long as they have a required small percentage of the money they have loaned out on hand in cash, they are free to create money and loan it out with impunity.  It's how the system works.  This is why they continually hound you to deposit more money with them, because each deposit increases the amount they can loan out.

Once you have the money the bank created for you in exchange for your I.O.U., you will give it to somebody else in exchange for your chickens, or you enterprise resource planning software.  That person then deposits that money in their own bank, where the bank uses that money as the basis to create yet more debt money.  The second bank is allowed to loan out slightly less than the original loan because of their own reserve requirements.  That loan is then redeposited and used as the basis for another loan, and so on.

The result is that every dollar of I.O.U.'s you write to a bank blossoms into about 100 dollars in the banking system.

Bankers are generally in favor of this system, because they get to charge interest on every loan along the way, which makes them fabulously wealthy.

There is one glaring flaw in this system: the interest on the loan doesn't exist.  In order to repay the interest, more money must be created.  To create more money, we have to create more I.O.U.'s.  This is called a vicious circle.

The result of this infinite loop is that the money supply--not watermarked money, but the I.O.U., or credit, kind--must grow exponentially, all the time.  If people stop writing I.O.U.'s, eventually the interest can't be paid back, which causes the money supply to start shrinking, exponentially.  This is called deflation, and is widely regarded as a bad thing among bankers.  It makes bankers say words that rhyme with "go spit", and look like this:

In 2000,this started happening.  But many people in government joined forces and encouraged people to borrow for all sorts of things, like houses they couldn't afford and McDonald's hamburgers.  They gave mortgages to people like this, so they could keep creating more imaginary credit dollars:

It kept the money supply growing, which made the bankers happy.

Around 2007, the "go spit" moment happened again.  People like the ninja in training started to default on their loans.  This caused the money supply to shrink, which made the bankers sad because they could no longer collect interest, and couldn't give out any more loans, which means they couldn't create any new money.  They weren't even collecting the interest on the loans they had made before.

The bankers and the government tried desperately to find new ways to make more debt.  Everybody tried to make people feel good so that they would borrow more.  They regularly appeared on television to tell people how great things were, and to go out and spend some more money.  They even tried giving money to people to make them feel better and borrow more.  But none of it worked.

Finally, as a last ditch effort to keep the money mountain from collapsing, they tried to move the entire debt money load off onto the US government, which they hope will make people write more I.O.U.'s again, so they can make more money.  But since the people ARE the US government, this doesn't look like it will work out so well.  The interest payment still has to be made, only now they're spreading the payment around so everybody in America will pay off part of the ninja guy's I.O.U.

Now the banks have yet another problem.  Because all of America is paying for everyone else's I.O.U., they still don't have any money to make new I.O.U.'s with.  Bankers will be unhappy because they still can't get the money supply to grow fast enough to make the interest payment, and the Americans will be unhappy because they're taxed so much that they can't make new I.O.U.'s.

So, my plan is to show my son a watermarked piece of paper from Ben Bernanke and an I.O.U. from me with my signature on it, written on a piece of junk mail, and tell him they're both real money.  Of course, the junk mail is worth far more than the watermarked piece of paper from Ben Bernanke.