Far from money being ‘the root of all evil’, our economic system cannot cope without it. Hence the shock-horror when the Lehman failure raised the spectre of an implosion of our banking system. It is far nearer the truth to claim that ‘Evil is the root of all money’, a witty phrase coined by Nobu Kiyotaki and John Moore.
If we all always paid our bills in full with absolute certainty, then everyone could buy anything on his/her own credit, by issuing an IOU on him/herself. Since that happy state of affairs is impossible, (though assumed to their detriment in most standard macro-models), we use – as money – the short-term (‘sight’) claim on the most reliable (powerful) debtor. Initially, of course, this powerful debtor was the Government; note how the value of State money collapses when the sovereign power is verthrown. Coins are rarely full-bodied and even then need guaranteeing by the stamp of the ruler seigniorage. However, there were severe disadvantages in relying solely on the Government to provide sufficient money for everyone to use; perhaps most importantly, people could not generally borrow from the Government.
So, over time, we turned to a set of financial intermediaries: the banks, to provide us both with an essential source of credit and a reliable, generally safe and acceptable monetary asset.