Money as Debt

by Paul Goodchild on October 24, 2008

If you read the title and have no idea how your money is actually debt, you are not alone.

Money is no longer based on any hard commodity like gold or silver, but rather as a promise from the government.

Its journey to you was through a series of loans from private banks, starting with the central bank.

This means that all money in circulation has been created from a bank loan and therefore represents a debt by someone, somewhere.

This principle underlies every aspect of our financial lives and we’re completely unaware of it.  Yet it is arguably the single largest influence on your life, your health, your wealth and your future.

The principles of money and its lack of any real value are so tightly interwoven through the fabric of our society that to imagine our lives without it is an exercise in abstract thinking.

You may think that I’ve received a knock to the head by a blunt instrument if you’ve never heard of any of this before.

But here lies the innate intelligence and danger of the system – the corruption of the banking and financial system sits right under our noses and the only reason it persists is because we’re all ignorant of it.

The meaning of money as we’re taught it

While growing up, you and I were both taught the monetary system as we know it today.

From the beginning we were taught that as we work, or provide a service or product, we receive money.

With this money we can go on to buy a product or service of our own desires- namely food, drink, gadgets, houses etc.

So the meaning of the money we learned was simple:

money represents the value of the products/services you provide which can then be exchanged for someone else’s products/services.

You never questioned it.

Why would you? Why would anyone question something so basic in our lives.

No-one else questions it, so why should you?

Let’s start with inflation – it’s a built-in rule of our banking system

So you start earning, but you soon find after a time your spending power has slowly and steadily decreased.  You don’t think of it as “spending power” exactly, rather you comment to yourself and others how things just seem to get more expensive.

Your salary is unchanged, but the goods you are buying are a little harder to afford.  Gradually. At first it didn’t seem so significant, but now you look to get a raise in allowance/earnings to compensate.

This is your your first direct experience of inflation.

Inflation is simply the devaluation of money.

The same product/service hasn’t increased in value, but the amount of money required to purchase it has increased.  This can only mean the value of your money has decreased.

And how does your money’s spending power mysteriously decrease?  Because of the way the money/banking system is structured.  It is actually built-into the system.

The cause of inflation

So what exactly causes the value of money to go down?  The explanation is long and complicated, but I’ll take a stab at it.

Let’s start with the Federal Reserve in the US.  This private agency is responsible for the creation of all money supply in the US. (Most 1st World economies have an equivalent private bank entity)

Read that again.  It’s important.

How do they create money in the system?

They loan it to the U.S. central bank.

Did you get that?  A private banking entity loans “magic” money to government.  Magic? Because before this loan was created, it never existed.

All money in the system today has been provided through a series of loans.  When the central bank (government) needs more money for the economy, it requests a loan from the Federal Reserve.

The money then gradually enters general circulation through private/corporate and inter-bank loans from the central bank.

This means that all money in circulation today is debt.  Whichever way you look at the money in your hand, you can trace it back to a loan taken from a bank.

It must all ultimately be paid back to the bank, WITH INTEREST.

So what if all debts were paid off?

there would be no money.

Each time more money is magically introduced into the system by the central banks, it isn’t based on anything, except the “need to have more”.

If all the available goods and services remains constant, but the amount of money in the system increases, the value of each dollar must fall, as the system becomes more diluted.

Things used to be different.

When we lived with the gold standard, the amount of money in the system was backed by the value of gold – a hard currency/commodity that cannot be forged (and thereby compromised).  Now, with the current fiat system (i.e. not gold standard) money is created out of nothing.  Nothing.

It doesn’t represent more monetary value, but less.

Take the following example, where the orange juice concentrate represents the value of the goods and services, and the water is the money in the economy.

You are making an orange drink from concentrate.  You pour in the orange concentrate and add water.  But you’re thirsty and want more orange to drink.  So you put what you have into a bigger glass and just add more water.  This doesn’t give you more of the actual orange juice (the good stuff).  You will just have to drink more in volume in order to have the same quantity of orange you had in the beginning.

That’s basically how inflation works.

You have more money (water) in the economy than before, so now you have to spend more cash for the same product (orange concentrate).  The products and services didn’t get any more expensive than before, your money just lost its value after it was diluted.

A conclusion

The value of the money that you earn is constantly at risk because it isn’t backed by anything real (e.g. gold).  It is a figment of the government’s imagination and subject to devaluation on a whim.  If a government requires more cash to spend, it borrows and thereby pushes down the value of your money.

But we haven’t actually touched upon the sinister aspect of the banking system, but if you’ve understood this so far, you’re in a good position to continue.

Please visit the follow-up article ‘Your interest in Interest‘ to see just how precarious our monetary system is and why our economy is collapsing around us.

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