En Defensa de la Fe

Money As Debt, This Is How Money Is Created

Money as debt! This is the way Money is created. That fact has triggered countless issues at the social, political, economic and environmental level among others.


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The cancer that is eating up entire nations is called 'DEBT'.

What Does Money As A Debt Imply?

Under the current monetary system, money is created by the private banks at the time when somebody is granted a loan (see 'How is Money Created'). Consequently, the debtor said a person, business, government instance or nation has to pay interest on it to its creators.

And to make things even worse, the applied interest is in most cases compound; in other words, the debtor has to pay interest on owed interest, making such debt to grow exponentially. For instance, between 1980 and 2012 the U.S. public debt has quadrupled!. (see 'The Rule of 72')!

Aren’t Loans Coming From 'Old' Money (money that other people have previously deposited into their bank accounts)?

No. The monetary system has a mechanism called 'Fractional Reserve Banking' under which banks are allowed to generate 'new' money 'out-of-the-thin-air' (also called 'Fiat Currency'), provided that they keep a portion of it in their vaults as a 'reserve'.

Is 'Money As Debt' Created as 'Fiat Currency'? Does It Mean That People, Businesses, Nations Alike Have To Pay Interest To Private Banks On Such Money?

Yes, that is correct!

As A Public Function, Isn’t A Public Bank The One Creating Money On Behalf Of Society?

No, it is not! Despite the Constitution of many countries stating that money is to be created by the Nation on behalf of its citizens, the power to create money was historically granted to private banks.

To take the U.S. as an example, its Constitution provides that Congress should create money:

'Congress shall have the power to coin money and regulate the value thereof, and of foreign coin'. Article 1, Section 8, Part 5.

Despite such provision, the power to create money was granted by Congress to the Federal Reserve (see 'the Federal Reserve Act of 1913'), which by the way is the U.S. 'Central Bank', yet it is privately owned! (see 'The History of Banking')



 What is the impact for 'Money as Debt' instead of 'Debt-free Money'?

First thing, by being created as a debt, money has become a scarce resource; all of us have to fight for it.

Secondly, society as a whole gets more and more in debt. This is by the way the reason why the level of indebtedness of entire nations has rocketed to a point where their economies have been about to collapse (look at 2011 U.S., Italy, Spain, Greece, Ireland and Portugal debt crises. On top of that, April 2012 sees Holland and Spain falling into recession, along with the U.K. for the second time in 3 years! On the same line, see the 'US debt to China' case).

On The Other Hand, Aren’t Public Banks The Ones Creating The Money For The Sake Of Society’s Well-Being?

No! This is in fact the double illusion that we all carry.

On the one hand, even if in a country the central bank is publicly owned, it does not create money on behalf of its inhabitants. As said earlier, this power was historically granted by countries' congress to the private banks.

On the other hand, it is up to the private banks to ultimately let money circulate since they are in charge of granting loans to the public. In other words the money flow, as the 'blood flow' of the entire economy, is controlled by the private banks.

How is it that Taxpayers Are Ultimately The Debt Payers For the Nation’s Money?

As said earlier, under the current 'Money as Debt' system, money is not created debt-free by the nation but as a debt to be paid to the private banks (see ‘How is Money Created’).

In particular, since the nation doesn’t create a single dollar for its own expenditures, it has to borrow such money from the banks (i.e. which is equivalent to say that ‘the nation has to ask the banks to create money out-of-nothing, borrow it from them and pay both the principal and interest to them’).

Therefore, the nation, through its tax system, is in charge of collecting money from taxpayers, to be primarily devoted to pay the banks for such debt (see 'Fiscal Policy and Poverty').

What Are Other Consequences Of The Money As Debt System?

Among other consequences let’s cite the impoverishment due to reduction of purchasing power, the lack of money for public works (see 'Fiscal Policy and Poverty') and the need for an incessant economic growth (i.e. 'Exponential Growth') up to a point where it becomes unsustainable for the environment, eventually leading to its collapse.

On the other hand, it creates an aberration on the wealth distribution system, jeopardizing one of the main purposes of Economy (which is indeed to properly Distribute Wealth). In particular, over the last 40 years the world has witnessed a concentration of wealth in the hands of a few, leading to all sorts of inequalities, social exclusion and unrest.

At the domestic level, 'money as debt system' has put a severe burden to the family model (based for example on 'mom-at-home' and 'parent involvement') for providing a safety nest to children upbringing. The struggle for economic survival has imposed the need for both parents to have more than one job outside home, dramatically reducing quality time spent with kids and between the couple. There are studies correlating money struggle with domestic violence, drug abuse and alcoholism among other issues.

And to complete the panorama, the current state of things has been conducive to an abusive financial speculation (see 'What Is Real Economy?') triggered by the bigger financial players for their own benefit. That speculation is the culprit among other things for the boom and bust cycles (see 'The Economic Cycles')in the Economy and for the major economic crisis in recent history, the Great Depression of 1929 and the 2008 Global Economic Crisis.

We invite you to explore here in more detail why the Money as Debt system is a major responsible for World Poverty!

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And How Can I Help?

You may wonder, 'how can I be part of the solution', 'how can I contribute?'. Learn more...