It would be inconvenient to carry around gold if the transaction is too large.   It has a high value to weight ratio, but carrying around a valuable metal can be dangerous.  There is a marvelous solution for these issues.  The money can be exchanged for a substitute.  You can deposit your precious metals which will be backed by a money substitute.  Those money substitutes are exchangeable on demand.

The use of money substitutes can take the place of gold—or other metals—entirely.  The substitute can take the form of a banknote.  That’s exactly what happened.  That’s how cash and coins emerged.  They can be redeemed by the banking institution anytime these substitutes change hands.  The substitute is a claim on demand so long as the money is available.  Banks have had the habit of issuing more claims to money than what’s available.

The banks will receive interest on the substitutes they lend beyond the money available—these are not money substitutes, it’s fiduciary media.  They can charge a lower interest rate than their competitors.  The banks can get away with this so long as people don’t demand their money back at the same time.  This can happen by their competitors pointing out the money isn’t there.  The banks form a cartel, legally.

The amount of money in the bank doesn’t increase when they issue fiduciary media.  There is more cash chasing the same amount of goods.  Everyone can’t get money back.  Honest competitors can hurt this fraudulent activity.  The state must make it legal to do so.  It guarantees you can get it back.  The state might guarantee you can withdrawal cash, but it can’t guarantee the value.  Deposit insurance is fictitious.

The issue of warehouse receipts beyond the money is fiduciary media, and that’s the cause of inflation.  The banks must form a cartel to keep their competitors from pointing out the fraudulent activity.  A cartel member can easily break the agreement.  They must form a legal cartel.  They make a bank of banks.  Now, its legal to counterfeit and the check of honesty has been removed.  Inflation and the business cycle are inevitable.

Reference

Ludwig von Mises; Human Action