Where do you think money comes from?

Question

I've recently been introduced to the concept that money is debt. Governements don't just print money notes, they authourise Banks to create money by arranging loans. The money doesn't exist before the Bank arranges the loan, then when a person promises to pay back the loan and signs on the dotted line, the money is keyed in and becomes new money. In this way, banks earn interest on money they lend out that never existed before they lent it. They earn interest money on money they don't have. And it's legal!

How long can this go on?

The requirement for paper money to be backed up by gold, silver or other precious commodity does not apply anymore. The Government has made it legall for Banks to literally create money from nothing and charge interest on it.

I object because a) money with nothing to back it up has no real value and b) To pay the banks their interest, we have to keep using up finite resources to fuel exponential growth. This is not sustainable, and with a declining oil supply, could result in a huge worldwide economic collapse in the near future. We need to build SUSTAINABLE economies if we are to avoid disaster.

Answer 1

The person creating the money is the one taking the loan. The interest the banks charge is the price of their own services.
The higher the prices of ''virtual services'' the higher the inflation, the weaker the currency at the international market.
And you are right - this does make an individual/country poorer. And yes, the situation leads to a crisis, as resources are finite.
This, however, is not illegal, it's just very stupid. It has happened before, it will happen again.
The good thing so far is that it does not happen at the same time in every country. So, figuratively speaking, when a country fails, another one takes off.
Bottom line is, if no one on Earth manages to create a working economy based on renewable resources, we are all doomed.

Answer 2

A lot of what you have learnt about money and its origins is true.

The majority of us are simply "wage slaves". Our wages and salaries do not meet the cost of the things we think we need. Buying a house means borrowing money very heavily. Getting a car or any other item which we think we need also means debt for most of us.

More people are in debt now than at any time in our history.

Until someone asks for a loan, there simply is no money in real terms. Once the loan has been agreed the debtor then has to pay an interest on the loan. It is this interest which becomes 'real money'. The original loan is just snatched from the air by the bank and comes in the form of a piece of plastic [ye olde credit card] or a bunch of neatly cut pieces of paper, bank notes or bank bills.

Here is a story about money. Twenty potential new bank customers were brought into the bank hall by the bank manager. The manager held a check book in one hand and a bunch of bank notes in the other. Holding them up so that everyone could see, he asked, "which of these is money?" Those customers who chose the check books got their new accounts.

Hope the above helps explain it a bit.

Re gold reserves - UK sold it's gold reserves about ten years ago. Gold price goes up and down like a yo-yo!

Edit: some time in the 1930s when inflation in Germany was completely out of control the Germans came up with an idea of ending it. They decided to issue new money which would be based upon the land called Germany. In other words the bank notes issued would somehow have a sacred trust and association with Germany [the land] itself. It worked.

Don't ask for a repeat. Like most responders above, it's really all down to 'trust'.

Answer 3

I don't understand why you are surprised or why you are objecting to this. Ever since banks began they have lent out money that exists only in their books. They know from experience that only about 10% of the money they have on deposited with them will be required in cash in any one day so they can put all the cash in the till and lend out 9 times what they have in cash and why not, In most counties there are laws about how much they must hold in cash or on short term loans. I think it is something like 30% in this country These laws came in when several banks went bust because there was a panic and a "run" on the bank This is the very basis of the banking system and if they did not do this you would not be able to have free current accounts or high interest deposit accounts.

Answer 4

In 1913 The US passed a vote on christmas eve by allowing the US gold reserve to become just a reserve,
They based the Federal Reserve on the British Bank of England design that gave a false sence of security to the people that the countries money was safe.
The UK dropped out of the gold standard to allow the government to print money in the way you have described.It`s the major concern of the phenominon of the Bubble economy, basically it can go pop and collapse.Most far eastern economies run on the same principle.
You lend the money out on longs,in other words the government secure loans on taxation,as long as there are enough people to pay tax the economy will survive ,but it is a knife edge economy,too many on the dole and couple this with ,say,drop in exports,inflation,falling house prices and you get a crash.This can be controlled however with investments in technology and I am afraid to say ,,, war,
The economy is controlled by the Bank of England in the UK but it doesn`t have any money, just the right to print it as long as it is equall to predicted economic growth, that`s why the Chanclors forcasts are so important.
hope this helps you out

Answer 5

phil the rum drinker had some good points.

Money is an abstraction, a value given to something as a result of a transaction of labor for goods or services. Barter is too clumsy and very subjective. The man who traded a wagon of grain for a heifer established that they were of equal value, but there were many trades that could not be done at one time or face-to-face, so metal became the medium of value. The grain could be sold to a granary for metal, then the metal could be used to buy a heifer and the herdsman could take the metal and buy a wagonload of grain, each kept some metal for profit and the govt. taxed that profit.

In 1930 an entry level wage would buy 5 loaves of bread and in 2006 an entry level wage would buy 5 loaves of bread. One hour's work was worth 5 loaves of bread, the amount of money needed has increased. Raising entry level wages will not increase the number of loaves of bread, but it will increase the amount of money needed and devalue the currency.

Governments may just print money at will so that they may pay off fixed amounts of debt with worthless paper. Germany did after WW I. More responsible countries have formulas for increasing the money supply based on economic activity, which generally works since it is based on labor for goods and services. If a country used debt to create more money and I don't doubt that some do, it sounds likely that they will be subject to extreme inflation and worthless money. It will go on as long as the government says it can. Japan used to have sen coins, but the yen is so worthless it can't be subdivided. Many countries units of currency were divided into smaller units at on time, so it can go on as long as the government in power.

Answer 6

It come from the ideal of a monetary value. Why does it exist because if it didn;t exist there would exist a barter system where you have to trade one thing to obtain another. Let say you have five fish and you want to for some lobster. depending on the amount of fish that the owner will take exist a value that the owner is willing to trade the lobster for. Without a monetary system this world would be unorganized and unable to work efficiently. It has value because it help everybody know the value of thing. Let say you want to buy a can of pepsi you know that it is around $1. without money you wouldn't know what the cost is. You have to figured it out, that why money exist. Money exist for the sole purpose of putting value on thing and making it universal for all to know

Answer 7

Your concept is correct however, as all loans must have collateral. A country borrows on its assets such as, industry, oil or mineral reserves or even its people if they have a marketable value such as specialised education. This allows countries to borrow over a certain time frame with the knowledge that it will have the assets to pay it back. can you imagine what the level of debt is in the USA currently and it is deemed to be one of the richest countries in the world.

Answer 8

Money retains its value, as long as it has sufficient purchasing power, or there is sufficient confidence in it for the future.

If it were not created by credit, most of us would be very poor.

Answer 9

Trees, of course!! I just picked a couple of dollars from the tree in my backyard!

Answer 10

Actually every dollar is supposed to be represented by it`s worth in gold held by that countries treasury.