It is a fiat currency. It has no inherent value.Exactly right.The paper bill is simply a physical container for a fractional unit of confidence in the US government, nothing more or less.This is a bit off target --- my belief in the value of U.S. currency has less to do with faith in the U.S. goverment than with my belief that other people will be willing to exchange goods for U.S. currency in the future. The only requirement for people be willing to hold a fiat currency is the belief that it can be exchanged for something else in the future. Where confidence in the U.S. government matters is in establishing price stability --- believing that the government will not dramatically increase the money supply in the future, creating inflation and lowering the value of the cash I am holding.

blog-O-rama [annmariabell.com]

Hrm, I think you missed my point.

In 25 years, I'll still be carrying cash around in my wallet, probably along with some whizbang enhanced ATM card. But the hype is still the same as it was 20 years ago.

I'm having a revelation (I'm only 29): Getting older means you you remember the last time someone talked about the "new" technology that all the younger people are talking about today.

Video phones? Bah.

Computers will reduce your workload... lies, lies I say!

Cashless society? Yeah right.

> That dollar bill in your wallet is no more or less money than a digit in a Wells Fargo computer.

No, there is a difference. The dollar bill is backed by the US government, the digit in a Wells Fargo computer is backed by Wells Fargo. To a certain extent the government will back up Wells Fargo, but banks are private institutions, they can fail, and they have in the past.

This brings us to a fundamental point about money, which is permanently swept under the carpet, which is where money comes from. The notes printed by the government obviously come from them, but the majority of money is invented by private banks when they give out loans. The common picture that your loan is someone else's money is wrong, it would be more accurate to say that this money did not exist before you took out the loan.

This is hard to believe, so let me show you how it works. It simplifies matters to imagine that there is only 1 bank, or if that strains your imagination, just imagine that A,B and C all bank with Wells Fargo.

Let us start with people A,B,C and a bank and keep track of how much money they have. The bank keeps separate accounts for A,B,C and itself

1. We'll start everybody off with no money, and nothing in their bank account
except for C who has $5000
External funds A: 0, B: 0, C 5000
Bank a:0 b:0 c:0 bank:0

2. C pays his money into his bank account
External A: 0 B: 0 C: 0
Bank a:0 b:0 c:5000 bank:0

3. A asks to borrow from bank so it breaks A's account of 0
into $5000 of money for his current account and a debt of -$5000
External A: 0, B: 0, C: 0
Bank a:(5000,-5000) b:0 c:5000 bank:0

4. The bank transfers the money to A
External: A: 5000, B: 0, C: 0
Bank a:-5000 b:0 c:5000 bank:0

5. A pays this money to B
Exernal A: 0, B: 5000, C: 0
Bank a:-5000 b:0 c:5000 bank:0

6. B pays the money into his account
External A: 0, B: 0, C: 0
Bank a:-5000 b:5000 c:5000 bank:0

7. A obtains money from elsewhere (easier said than done)
External A: 5500, B: 0, C: 0
Bank a:-5000 b:5000 c:5000 bank:0

8. A repays 5000 to bank, plus interest of 500
External A 0, B 0, C 0
Bank a:0 b:5000 c:5000 bank:500

9. The bank pays some interest to C
External A: 0, B: 0, C: 0
Bank a:0 b:5000 c:5300 bank:200

So far, the bank has done nothing strange, and this actually corresponds to the understanding that most people have about the way banks work. One thing to notice is that when A received $5000, nothing happened to C's account. Theoretically C could withdraw his money at any time.

The clever bit is that step 4 never needs to actually happen. A doesn't remove $5000 in cash from his bank - he just writes a check out to B, who never takes out the money either - he just pays it into his account. So in order to "lend money" to A, all that the bank needs to do is change it's accounts from saying:

Bank a:0 b:0 c:5000 bank:0

to saying:

Bank a:5000,-5000 b:0 c:5000 bank:0

Which means: A has $5000 in his current account and also has a debt of $5000 in a separate account.

and as far as A is concerned he has borrowed $5000 from the bank.

But there is nothing to stop the bank from "lending" lots of people money in this way. Why not lend D $5000 too, just change the accounts to say:

Bank a:5000,-5000 b:0 c:5000 d:5000,-5000 bank:0

The money that it lends out does not have to exist before it lends it out - the bank invents the money [temporarily]. In fact, almost all the money in circulation has been invented in this way.

Are banks allowed to do this - isn't there a law against this ? No, not at all, banks are expected to do this - in fact without the banks providing credit, the money supply drys up and the economy goes into recession. There used to be laws specifying a limit - banks could only lend out X times as much money as they received, but these laws have been scrapped in most modern economies. The only constraint is market confidence. If people start to lose confidence in the bank, too many people demand to physically get their hands on their money at the same time, then the whole facade comes tumbling down.

When banks lend people money, they increase the amount of money in circulation. This changes the balance between the amount of money in the world and the amount of stuff in the world. This slightly decreases the value of all money - it is the root cause of inflation. Effectively banks steal money off everybody else by lending out more money than they have. It's a form of legal forgery. A private individual would have exactly the same effect on the economy if he produced perfectly forged money that he was allowed to add to the system on the condition that he removed and destroyed the same amount at a later date.

An expanding economy needs an ever increasing amount of money. The more stuff in the world, the more money is needed. This money is invented by private banks in the form of debt. Even governments borrow their money from private banks. So we have this paradoxical situation where the most successful countries have the largest amounts of debt.

During boom times the credit supply increases. The system keeps afloat by ever increasing amounts of debt. In order to service this debt, the economy *must* expand - it is completely impossible for the monetary system to stay afloat with a stable economy, because the only way the debts can be serviced is by creating new debts.

Obviously this debt cycle cannot quite go on forever. At some stage people lose confidence, and it becomes harder to get credit. Then businesses go bankrupt, banks foreclose on the assets, and we go into recession or depression. Then gradually things improve and we start over again - the only difference being that now more of the actual assets in the world (rather than just the money), are then owned by the banks.

So the boom/bust cycle is inevitable when all money is created in the form of debt. The system is inherently unstable. We end up with rather large debts. For instance, the national debt of USA is $5,673,018,308,921 (last time I checked). The estimated population of the United States is 276,004,098 so each citizen's share of this debt is $20,554.11. The money to service this debt is extracted (taxed) with menaces by the government and paid to the banks. If you wanted to be alarmist about it, you could say we are selling our children into slavery (or at the very least indentured servitude) to the owners of the private institutions that invent our money.

Whose idea was this wonderful mechanism for inventing money ? Amazingly enough, it was the bankers. In 1694, Britain's King William was having trouble with money and probably did not understand it too well. At the time governments were scratching their heads over how to pitch the speed of money supply to the economy so as to avoid periods of inflation and at the same time finance their wars, build their palaces and even, from time to time, make life bearable for their people. The bankers convinced King William that the bankers were the "experts" who understood money and that the job of issuing currency should be handed to them.

As the amount of stuff in the world increases, the amount of money needs to increase. An artist paints a picture and wants to sell it - the amount of stuff in the world has just increased. Either: more money has to be created everything; the price of everything needs to reduce slightly; or we have a world where their is plenty of stuff, but nobody can buy it. It is a good thing that extra money is constantly being created, but having banks create it all in the form of debt is not necessarily ideal.

Letting the banks invent all money in the form of debt is not the only possible system. For instance, the government could invent money and give everybody a certain amount each year. This scheme was advocated by Douglas in the 30s and was making progress before war broke out. The introduction of more debt free money into the economy would reduce the need for loans and gradually eliminate the boom and bust cycle. Of course if the government invents too much we end up with inflation. But we have inflation already because the banks are inventing money all the time. If people were given money, they would borrow less from the banks so we wouldn't need inflation. A lot of inflationary pressure comes from the need to make interest payments. This scheme is far less inflationary than you might think.

The reason that the current system (where money is invented by banks) has become dominant is that the current monetary system is good at creating a vibrant thriving economy where enterprise is encouraged and financed - it undeniably encourages growth, in fact, it can't live without it. A stable economy is absolutely impossible in the current system, people must be perpetually taking out loans and investing. Without constant investment and new loans the money dissappears and we sink into recession. That's why the idea has spread so wide - it's the most competitive model so far seen.

It's not exactly perfect though. The tendancy to enslave populations into the service of bank owners is one flaw. An insatiable need to expand economies until the whole planet is covered in concrete is another. The necessity for people to work like mules their whole lives, scraping a living amongst plenty when automation should provide us with leisure is another. The maintenance of a huge parasitical segment of the economy that creates virtually nothing of value is another. I could go on, but I think you see my point - the current system is not ideal.

That dollar bill in your wallet is no more or less money than a digit in a Wells Fargo computer. Both represent a unit of confidence in the issuing body - the US government. That is all they represent. You cannot redeem that dollar bill for a fraction of preciou metal.

You know, I used to believe that too. More and more, however, I am coming to realize that there is a new truth. The dollar bill represents faith in something other than the US government, it represents faith in the world economy. I can take that single US dollar to another country and exchange it for other fiat currency, or for precious metal on the world exchange. If I want gold, I can get it, just not from the US Treasury as previous generations could.

You are correct, I may not receive a set unit of foreign currency for it. Foreign governments may or may not decide to honor my US dollar; however, if they don't, it's likely in this age of the 'global village' that their own economies will be adversely affected. The concept of economy has become larger than national borders, and as a result, paper fiat currency has more power now than it did before.

And arguments about "inherent value" are really silly. Value is something we humans ascribe to things. Nothing in nature has any value independent of that. But if we're going to start assigning values to things, than we in the US may as well use units of dollars, and my piece of paper may as well be worth 1 unit.

At least someone is making money off of it. Last time I checked, my wallet didn't pay interest on its contents. What do I care if someone else profits while I still get the same effect?