What is Money?
Throughout all my research on money, what it is and how it is created, I actually had a huge misconception. My original understanding of money was based on true value and sustainability, a model that is closet to that followed when money was first conceived.
In actual fact, how money is created in the modern world follows a far different model that may amaze or even shock you. The true nature of money in modern society is one subject that is never taught in schools. It is a fiendishly clever creation of a small number of powerful people and once you grasp it, you will understand why you never got a wholly truthful answer to the question “How is Money Created?
The surprising fact is that money gets created out of debt. Banks do this to ensure there in enough money to lend, so they can make profit by charging interest. There is never enough money deposited in a bank to cover the amount of loans it issues. The debt to real money ratio is more likely 9:1, 20:1 or even higher. Central banks, like the FED, guarantee that when a single bank needs money to cover the loans it issues, it can request it. The banking system is regulated to allow this to happen completely legally.
How the system is controlled and regulated is ingenious and requires the complicity of governments and lawmakers to complete the picture. Governments print paper money, or “fiat currency” to cover the debt created by banks, and law makers ensure that this currency can legally be used to discharge debts. Governments complete the picture by themselves borrowing money from banks to finance the operation of countries. Thus the entire system is self-perpetuating.
This is the reason why the money supply grows over time and why there is never sufficient “real money” to repay all the debt that has been created. The fact is although banks charge interest on all debt they create, they only create the capital amount of the debt, not the additional money to cover the interest they charge. This is why the total amount of money in the system grows over time. However, its real value always lags behind, and, in fact, reduces. In the short term, deficits and exchange rates are used by accountants to balance this figure. However, in the long term, the figures never really add up; it is only the time lag between the creation of debt and its repayment that keeps the system from breaking down.
Now you realize what happened in the US economy in the fall of 2008. There was not enough real money to pay back all the loans that defaulted. The defaults all happened in the short term, so the banks immediate money supply was not sufficient to repay the capital that had been created. Funny how the owners of the banks who were affected threw up their hands and told everyone: “It’s not our fault!”. They were the ones who created all the “funny money” in the first place! The law makers and FED step in to shore up the system; the banking system simply hiding the fact that the money needed do this will simply be created in the same way.
In the great depression, the FED let the affected banks fail, destroying the savings of all the depositors and plunging the US into a hiatus that lasted 5 years, until the money supply caught back up with the growth needs of the society. The real truth is that those deposits were already worthless; being based on a grossly over-inflated economy.
So, there you have it. If you are interested to learn more about this, I strongly suggest you take a look at this excellent video: Money as Debt
Author : Malcolm
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