kidmercury

Today's message is the story of how money is created.

Money is created out of debt. Here's how it works:

1. The US government is spending more than it takes in, a condition known as deficit spending. To get the additional money it needs, it does the same thing you or I would need to do: borrow.

2. The US government borrows money by issuing US Treasury bonds -- promises to pay back later, with interest. It's like a credit card.

3. This is where money starts to get created. TheMoneyMasters.com breaks it down for you:

Thus, when the Federal Reserve buys bonds, it is printing money in exchange for debt. The Federal Reserve is a privately owned corporation, and thus a private organization profits by putting a nation into debt. (This naturally leads to lobbying to expand government spending and government debt).

4. The United States banking system operates under what is known as fractional reserve banking. This means that banks are allowed to lend out X times more. So, if a bank has $100 in deposits, it can lend out $900. And thus, the Federal Reserve creates the initial money, but the true expansion of the money supply comes when that money is deposited into a bank and lent out.

At this point, you might be thinking, "That doesn't make any sense. You mean the banks just lend more money than they have? Does that mean they print more money?"

Yes. That's exactly what it means. Also implicit in what we've discussed thus far is that all money is created out of debt. And thus, ironically, if all debts were repaid, there would be no money. This has been referred to as the Mandrake Mechanism.

5. As you can imagine, with all this money printing, the currency is going to get devalued. And thus, the price of all goods and services in such an economy perpetually rise; this is why an ounce of gold in 1900 cost 20 US dollars, but now costs around 750 US dollars. For a deeper look at the specific issue of money supply inflation, see our post on commodity money.

This is how the banking system controls society. The twin weapons of debt and inflation are the real reason why the vast majority of people live on next to nothing while a tiny majority -- who, unsurprisingly, are heavily invested in the banking industry -- own everything.

The Solution

The problem is certainly a tricky one, as we are completely dependent upon this tyrannical system, and thus cannot sever it immediately. Moreover, there are plenty of thoughts on what type of monetary policy would work best. I'll elaborate on my thoughts in a future post. For now, let's look at what most people will agree on:

1. Humans are naturally incentivized to try to manipulate the money supply. I do not say this as a good thing; obviously, cheating by counterfeiting money is not good. Yet history has shown us that people are going to try to do just that, and that they are going to try very hard. The reason should be obvious; printing money is one of the most profitable businesses to be in.

2. Because of the previous point, we should be wary of any attempts to centralize control over the money supply.

3. We want money to be easily transportable, easily storable, widely exchangeable, and a safe store of value.