Debt is money! Our current monetary system is debt-based
When it comes to debt, many people think that debt is a bad thing. Many are trying to avoid it. Is it true? If it is, why we are still having debt in our economy. Why this bad system is not being abolished? In fact, it is important for our economy.
On 15 August 1971, the United States President Richard Nixon announced the change of the rules of money and suspended the link between money and gold. Since then, the US dollar (money) is no longer defined by gold. The money becomes debt-based which is the current monetary system. This decision has not just affected the United States but the whole world. The money is then supplied based on Fractional Reserve System which requires more debts all the time.
Fractional Reserve System is a system whereby the banks can take most of the deposits from the depositors and lend out to people and institutions which require loans, after reserving some portion of money (as reserve). For example, when A deposited $ 100,000 to bank X. Say the reserve requirement is 5% for easy calculation, the bank only required to maintain $ 5,000 in the bank as reserve. Then, the bank lent out $ 95,000 to B to purchase a car from C. C received the money from the bank and deposited the $ 95,000 to bank X instead of keeping it at home. Next, bank X had extra $ 95,000 as deposit which it lent out $ 90,250 ($ 95,000 x 95%) to D for him to buy some products from E to run his business. How much money has been created through the scenario?
Debt B – $ 95,000 D – $ 90,250 Total $ 185,250 |
Money A – $ 100,000 (hard cash) C – $ 95,000 (new money created) E – $ 90,250 (new money created) Total $ 285,250 |
Through the system, you can see extra $ 185,250 is created in the market using $ 100,000 hard cash. The above is just a simplified version of money creation. The process can go on and the money creation can even reach millions. As long as people are depositing money into the bank, the bank can lend out the money, the money creation process will keep going. In conclusion, there is no way debt will get abolished. We all need it for economy growth.
No debt, no money creation. Debt is in fact money!
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