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How Money is Created from Debt, Not Gold

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How Money is Created from Debt, Not Gold
Back in 2006, Canadian film maker Paul Grignon produced an animated documentary called “Money as Debt” (1). The film is a dissertation of how banks “create” money by loaning it and creating debt.

This view of money as debt is not a new one. However, Grignon contends that the current system is unsustainable because this form of money creation creates a vicious cycle of borrowing that funnels more and more money to the banks, eventually impoverishing entire nations and their populations.

Modern banking operates on a fractional reserve system (2). That means that banks maintain reserves that are only a fraction of the amount of money that is actually deposited. The rest of the deposits are loaned out to borrowers.

The system can break down if an economic crisis occurs and too many depositors demand their money. This is called a bank run, an example of which happened in the wake of the 1929 stock market crash, leading to the Great Depression.

To stave off a reoccurrence, most countries regulate banks, provide insurance for depositors, and are lenders of last resort.

Lending at interest has been part of economies for hundreds of years. Most people have taken out loans to buy a big-ticket item such as a car or house. Businesses borrow money for startups or expansions. Banks loan out money based, at least in theory, on their assessment of the borrower’s ability to pay them back.




The Problem with Too Much Debt

Debt has proven to be an engine of economic expansion when prudently entered into. It can allow people to buy things and pay them off over time that they can otherwise not afford.

One effect is that people who build houses, cars, and other items that are bought and paid for over time benefit from the wider availability of their products that the ability to borrow had caused. Businesses can form and expand with greater ease when they can borrow money.

Of course too much debt can become a serious problem, for both countries and individuals. Greece, for example, has gotten itself in serious trouble by financing a generous social welfare system with debt. People can lose their jobs in an economic downturn, find themselves unable to pay their mortgages and credit card balances, and find themselves bankrupt and homeless.

Grignon’s film has been, mildly speaking, controversial. The controversy swirls around not only his theme of the banks devouring everything in sight, but his solutions for the crisis he maintains is happening. Among his prescriptions include nationalizing the banks and direct government printing of money.

Control Over Economy

Paul Solman, an economist who reports for the PBS Newshour, is especially dismissive of the thesis of “Money as Debt.”

“His great insight, as near as I can tell, is that money is debt — true — and debt is bad. Really? Debt is bad? Money is bad?

“Look, debt can be abused. Who would doubt it? The ability to create money can be abused. Again, who would argue otherwise? But for goodness sake, everything of value can be abused, from land to love to food to friendship!” (3)

Solman went on to explain that people and institutions have been taking on financial obligations they cannot meet since the beginning of history.

Trevor Peck, an economics blogger, concedes the point made in the film that it is unhealthy that a small group of bankers are able to have such great power over the economy (4). But he points out that Grignon’s solution, to transfer that power to the government, would make things worse.

The government, unlike the banks, would be unfettered by economic considerations. The state would make investments with the money it controls based on whim rather than on expectation of a return. That road leads to Greece or, worse, Venezuela, now on the verge of economic collapse.

References & Image Credits:
(1) YouTube
(2) Fractional Reserve Banking
(3) PBS
(4) Trevor Peck
(5)

Originally published on TopSecretWriters.com

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