How does a money system works ?

Barter system in my view is the way forward.  In the old days it had no hope of working because the commodity you were bartering tended to be difficult to match up with something to swap with.  That barrier is no longer there as we can all contribute in some way or other to the economy.  Nowadays we barter a lot more than we think we do.  For instance my subscription to EE is a straightforward barter of me gaining points for answering questions, rather than me paying to view other people's answers.  In some ways it is the Tax systems used throughout the world that prevent bartering from taking off in a much bigger way.  Governments find it difficult to quantify the value of goods from their point of view, so they want some means to find out how much it meant to the parties that were actually involved in the exchange, currency allows this to be quantified more easily.

And finally:

As the resources of the earth are being used up there will also be a much greater need to "back" currencies or goods against raw resources.  There will be situations very soon where it will not matter how much money you give someone to cut down trees or pump oil out the ground, legislation will be enforced where it will be illegal to go over a particular limit on purchases.  Statutory levies are already in place for some things that clients of mine purchase.  Many countries now "barter" their emissions for example with other countries in order to stay within guidelines (offsetting).

Vigus,
In your upper diagram you show mineral resources moving into the economic system, but you don't show anywhere that they are being destroyed or dumped. After being exchanged for money some of those minerals are destroyed or burned for energy or otherwise turned into waste products and so leave the system. This will enable some sort of balance. The money in the factory will be distributed amongst the person1-n's in exchange for work to keep the production going so it won't accumulate in the factory but be distributed around the system.

@RobinD :
Yeah,  In the upper diagram, i have not shown dumping. Obviously, there is always, irresistable, destruction to every thing.
But actually, in the upper diagram, i wanted to show, that either the destruction is almost nil  or  the production takes care about compensating the money destroyed too.

Money these days doesn't get created or destroyed dependent on underlying resources (see gearing in my previous comment).  In UK I think it is correct to say that the Bank of England are currently printing money without anything to back it with.

...other than the UK government's reputation to honour it's promises.

In that "micro" world, as you say nothing of consequence has been created or destroyed.

Some mechanisms need to be created that deal with situations such as what happens when the farmer dies, who will honour his promisary notes?  And what happens when there is such a poor crop yield one year that the farmer cannot feed everyone that comes to him with their promisary notes?  These already are beginning to sound like the complex "artificial" insurances against things that might happen, which our present-day society revels in.  

The probability of a bad crop year can be forecast from previous years, and this is the way many things are calculated, but that doesn't always work, and this is where our society comes unstuck.  

>And what happens when there is such a poor crop yield one year that the farmer cannot feed everyone that comes to him with their promisary notes?
this is a real world problem.
You maybe able to predict a bad crop, but you are still left trying to store perishables until the next good season. They get round it somehow because we are all still here.

what I was trying to say in my 'micro world' post is what money is, that it represents a work-unit that can be stored and used later.
It is possible to accumulate a lot of these units especicilly in times of famine if you are a food producer or stockpiler.  But this accumulation doesn' t represent created wealth. It is only a representation of items or services. Services once used only transfer the wealth to someone else and items will eventually decay. Money isn't created it's just moved from place to place.

Crises change everything.  I suppose my posts boil down to the fact that Money has no intrinsic value.  In the apocalyptic scenario which inspired this question money itself is totally worthless.   Perhaps I should clarify that by splitting Money down into two segments: Notes and Coins.  Notes have nothing intrinsically within them that are worthy of what one can buy with them, apart from their value to collectors of them (notaphilia) but that is a side issue, whereas Coins in their original concept should be made with materials that do have intrinsic value, but that is becoming eroded by the use of worthless materials in their manufacture.  Gold is pretty useless to most people, yet it is universally accepted as a tradeable commodity because it is useful to "somebody".

^ In turn, money sucks, and I am going to start trying to pass off chickens in barter for other services (if for no other reason than seeing hilarious facial expressions).

Umm Jason, I have some news for you:-

http://www.ukfoodguide.net/e175.htm

OK it's an additive - not food for a starving man lol.

>The ideal form of currency would be something that represents the share we have of these things.

That sounds like the universal currency which is needed.

>So, to get wealthier, an economy has to generate more debt.  That is why we had the credit crisis we did over the past few years.  The debt created a wealth bubble, that then burst.  In bursting, many jobs were lost, many companies ceased to operate, and much debt was written off in the process.

This is not necessarily true (if what you are saying is that more debt is necessary).  Companies can and do generate more wealth from the money they borrow.  The stock market goes up in valuation, and not just because of speculation (it is a true statement that the stock market is worth more in market captialization than it was 20 years ago, and so on into the past).

The credit crisis happened because people and companies borrowed excessively, more than they could pay back under all scenarios.  In a normal economy, money is regularly borrowed to pay for immediate expenses and to capitalize projects for future income.  When financial institutions are unwilling to lend money and trust is lost, a credit crunch ensues, and companies fold because they can't service their debt.  If borrowing had occurred at a more normal pace, no crisis would have occurred.

thanks!

Interesting thread & thanks for the points!

Yes Callandor, it was the rate of debt that was the problem, not debt in and of itself -- I hadn't intended to imply otherwise, that's why I said "bubble".

Anyway, I disagree about stock, however, and if you examine a public company's balance sheet you'll find stock in the same column as loans -- they are both liabilities, i.e. debt.  A stock certificate is a promise to pay a debt.  But that promise is also exchange traded - just like treasury instruments, currency, and even mortgages.

This is a good example of how modern finance has made it very difficult to understand the true value of something.  Stock price is a metric many look to for an estimate of a company's value, but don't be fooled into thinking that it actually has value.  And there are many ways to measure the value of a company -- most if not all are considered into the stock price of a company (e.g. revenue, cash, margin, inventory) -- but also remember that the price is subject to the whims of popular opinion and the 24-hr news cycle.

Anyway, the point is issuing stock is issuing debt -- when the price goes up, so does the debt and so does the amount of money in the world.  When stocks crash (e.g. GM stock is worth nothing) the debt is decreased or even eliminated, and money is destroyed.

Just a related question.. when actually a government decides to produce more money.. ?

 Take for example, if a big group of richest people of the world, somewhere decide to SECRETLY destroy all the money they possess. The government never knows about this plan. And the whole system is running as it is.  When and how would , the government know , that now  time has come  to produce money/ or produce more money then actually required  ?

Vigus, a government creates more money by issuing debt.  The U.S. government, for example, increases its cash flow in generally two ways: issuing more debt or raising taxes.  From the second, you can see that this money was already "created" before the government took a portion of it -- it is from the income of entities who were paid the debts owed to them (e.g. labor, interest, capital gains).  From the first, however, they are creating a debt that didn't exist before, so money is created.

Here is an article that may help:  http://www.econlib.org/library/Enc/GovernmentDebtandDeficits.html

As for an evil cabal of money-haters  ;-)   I suppose they could try to convert as much of their wealth into physical currency, and then destroy it.  Certainly this would permanently remove that money from circulation.  However, apart from being illegal, it also would not go unnoticed by bank authorities if they happened to amass enough currency to actually become significant.  I they tried to burn $500 B in bank notes, the simple collection of that much money would "red flag" their activities and spawn an investigation.  As for destroying other representations of wealth and debt (e.g. stock certificates, loan agreements) just destroying the paper doesn't eliminate the debt -- it's still on record.  They'd have to sell all of these and convert it to currency.  Again, you see of the paper trail and odd behaviors would become noticed.  It really couldn't be done in secret, and I don't think the government response would be to just create more money.  I think prosecution is more likely.  ;-)