Where does money come from? Perhaps you hadn’t asked yourself this question before and maybe it’s because you never saw its use, but you need to know that it is a very important question. This question involves origins and therefore sovereignty. Whether you believe it or not, it had haunted economists for a very long time and no one had been able to give an exact answer. However, the most widely accepted theory, due to its reasonable logic, is that the most marketable commodity arose within a free market.
Some economists and historians attribute the origin of money to man and the actions of this one within a free market. It is believed that the first interactions of trade were made through barter, this is exchanging a good, like a sheep, for another good, like a rag. Soon, however, it became obvious that it was difficult to find someone who would exchange a specific good for another specific one. There had to be a general good that was valued by all, easy to carry, divisible, and which’s value didn’t depreciate over time. This good would be the most desired commodity, due to its ability of facilitating exchange. This good would be known as money.
From mere feathers to gold and silver, acquiring money became a priority in people’s lives as it allowed you to obtain almost anything you needed or wanted helping you live life better. When gold and silver became the dominant mediums of exchange, things began to get a little more complicated. It became easier to cheat through counterfeit money, false scales, and many other ways. The economy began to be more propense to corruption, immorality, and ultimately, instability. People were more afraid of theft and scarcity or poverty. They needed to secure their money and be able to control the surrounding circumstances trying to prevent their prime mean of survival from any evil exposure. This is when goldsmiths and their safe vaults came into play.
Man, unable to control things by nature, placed his trust in man to take care of their money (prime mean of survival). People chose to rent a space in the vault of the goldsmith to secure their gold. As proof of storage, the goldsmith would hand out a receipt representing the amount of money stored. Whenever they wanted, people would be able to take out the quantity of gold stored by exchanging the receipt and using it in the market. Although, people soon became aware that it was more practical to simply exchange the receipt in the market than the gold stored in the vault. This became the origin of paper money.
Goldsmiths then began to make business and started handing out loans with an interest fee. This was virtually the origin of banking. Goldsmiths would now be in advantage as they were the only ones who stored the gold or silver and were the only ones who knew the exact quantity that was stored. Soon they realized that basically no one came back to exchange their receipts for the gold stored, this due to the fact that it was more practical to simply exchange the receipt in the market than going to the bank, drawing the gold, taking it to the market and buying with it. People’s actions gave the goldsmiths or bankers a mischievous and greedy idea.
They began creating false receipts that represented an unexisting quantity of gold within the vaults based on nothing but the debt of the borrowers. As you can imagine, this ability to create money made the bankers filthy rich, which soon caused suspicion between the clients whom thought that the goldsmith or banker was spending their gold. However, the truth is they were simply creating false or counterfeit money. When this got to the government’s ears, far from punishing it, they simply legalized it and regulated it, because they needed large amounts of credit to continue their expansion. This regulation would soon create the fractional reserve system.
In the beginning, the government would inspect banks to not create more money than a nine to one fractional reserve of gold. In simple words, banks could multiply the gold nine times more with newly created unbacked paper money. Every action would be controlled by a central bank backing up comercial banks. Banks would keep on lending money with an interest fee and creating money based on the promise to pay by the borrower. Only the currency or legal tender approved by the government, which was created by the central bank, became the only means of paying debts and making exchanges. Any other currency and bank would be illegal making the government and the bank owners the only legal authorities over what happens with money and thus, the economy of a nation.
Throughout the years, however, money stopped representing value or gold and it began to represent debt. This means that the amount of money created can only be limited by the amount of debt and not by a nine to one fractional reserve. Why? For two reasons: #1, since the 1930’s gold is by law not a marketable commodity and #2, because money is created when people borrow from a bank to buy something. The borrower promises he will pay back the money plus an interest fee. This promise of paying back is what gives the bank the incentive to create more money, even if the payment has not yet been completed. In a nutshell, the bank creates money it really doesn’t have.
When the borrower uses the loan to buy something in the market, the new recipient of the money, who acquired it through a sale, not a loan, will deposit his money in the bank to keep it safe. This newly deposited money, which in the beginning was issued by the bank through a loan, will give the bank another incentive to lend and create money by dividing the new loan through the fractional reserve. This is because the deposit is not seen as a paid loan, but as new money coming in.
Therefore, if the money we own doesn’t represent gold, just the paper or digit itself, and if the money we use to buy and deposit is the money the bank issued out in the first place through a loan, what sense does the economy have? The answer is simple, none. Every value we give money only exists in our hearts, not in a material thing. And as long as we keep doing the same economic things, business cycles, recessions, depressions, and wars will keep on happening.
To make it simple, suppose you ask me to lend you a car. I don’t have a car, but we get in an agreement and sign papers saying that tomorrow I will bring you the car. The next day I come with a piece of paper with a car’s picture on it telling you that this is your loan and you are now in debt with me. In the bank, this piece of paper is known as an IOU and it’s the money you and I use to buy with in the market. An IOU is a promise of a money that doesn’t exist, like the car. Lots of people believe that their loans are extracted from the deposits other people make. Truth be told is that 95% of the money in circulation was created out of a borrower’s promise to pay what he owes.
The bank’s limit to create money is essentially limited by our ability to not want more loans. The more debt there is, the more money there is. What’s worse is that even when the bank has the ability to create money that has no real value, the bank’s clients are coerced by the government to pay back what they owe or else, they will literally take away everything the borrower possess, which are the only things that have real intrinsic value, like houses, cars, etc. This implies that as long as we are in debt with the bank, this one will virtually own everything we have.
Now here is when things are really tricky. It is good for you as an individual to pay your debts, it’s a burden off your neck, and you will have more money to spend. However, if every person pays their debts, all money will be gone ultimately collapsing the system. Remember, the creation of money depends on debt. If there is no more debt, paper money would soon stop circulating. Many people actually think that if all debts were paid, the state of the economy would better, unfortunately this is only true for individuals, countries, however, would go into a recession.
Banks only create the quantity of principal but not directly create the money used to pay the interests. The money for interests comes from the money in circulation, which was created as principal money in the first place. People have to use this principal in circulation to pay their loan (principal) plus the interest rates of the same. Therefore we see borrowers in similar situations of tremendous debt trying to acquire money to pay the principal plus the interests. Yet it is very complicated for some to pay the principal and the interests using the limited amount of money in circulation (which is principal), thus some end up foreclosed.
The main problem is in the case of long-term loans, such as mortgages and public debts because in these the amount of interests many times exceeds the principal. Unless a huge quantity of money is created to pay the interests, the economy will not be able to function properly. For proper functioning, the rate of debt cancellation must be low and to accomplish this, more debt must be created to create more money to satisfy the demand of money needed to cater the interests of the previous debt. Perpetual debt is the result of this.
The system causes the level of debt to inevitably rise forming more interests to be paid ending in an ascending and unstoppable spiral of indebtedness. The only thing keeping the system from absolute bankruptcy is the the time lag between the new loan money and the repayment. Against all odds, the debt is continuously growing urgently needing more debt money to be created to satisfy the system.
All of this availability of banks to create endless money is the reason why governments, banks, corporations, industries, businesses, families, and individuals are all in debt at the same time and by exorbitant amounts. As we have learned banks need people to borrow from them that they may be in control of the economy. As long as they with the government possess a monopoly over a nation’s currency, the citizens will be at their mercy. Honest money comes with the freedom of people to choose what medium of exchange they want to use to pay their debts and in exchange.