Common Sense Living

How Does Money Get Created?

Ever wonder how money gets into circulation? Who is the first one to spend it? Did they just print it, and then spend it? This blog entry will answer these questions.

There are 3 ways for money (or currency) to get into circulation:

  • Earning it into circulation
  • Issuing it into circulation
  • Lending it into circulation

When money is EARNED into circulation, there is an effort expended and work performed to bring the money into existence.

The gold (or silver) standard is just such a system. An effort is required of the gold miner to dig the gold out of the ground and refine it. It costs value to perform this function. When the miner eventually sells the gold bar, he covers his costs, and makes a little profit along the way.

Unfortunately, most nations are no longer on a gold standard. Gold has been, and will continue to be, the most stable form of money for as long as recorded history.

Under a gold standard, as demand for money (gold) increases, it’s value increases. This causes gold miners to work harder to mine more, and for new gold miners to enter the business of mining. Then as the supply increases, the price begins to drop again. Maybe it now becomes under priced, which causes some mines begin closing. This market-based mechanism for the value of money is the main factor for gold being the most stable and reliable asset in world history.

Cryptocurrencies are another form of money earned into circulation. There is a certain unit of work and expense incurred to mine a cryptocurrency such as Bitcoin. In fact, the rate at which Bitcoin can be mined was modeled after the rate at which gold can be mined.

Money may also be ISSUED into circulation. To issue money, a government will simply print some paper, or put an entry in a computer account, and then spend the self-declared money. This is called “fiat” currency, meaning it is declared to be money through an act of law. The government will reinforce the law by declaring that taxes must be paid using the fiat currency. This causes an artificial demand for that currency.

Fiat currencies are nothing more than legalized theft. If you or I were to create a piece of paper, put a number of $100 on it, and spend it as if it was worth $100, then we would be arrested for counterfeiting. For some reason, governments are able to do this with impunity.

Fiat currencies issued into circulation also create theft through “inflation”. Whenever money is created without a corresponding “earned” demand, the first person (i.e. the government) to spend the money is getting something for nothing, and the inflation of the money supply causes a general rise in prices. Inflation of the money supply is theft. Your pay remains the same, but the prices of everything that first purchaser bought rise. Furthermore, if you own assets, you get taxed on the gain caused by the inflation, even though the real value didn’t increase!

Bottom line, fiat currencies are just legalized theft.

Money can also be LENDED into circulation. This is how money is created in all major economies in the world today, and it is the most CORRUPT form of money creation.

In this system, the government issues an IOU (a bond, or debt). A bank (i.e. a central bank like the Federal Reserve) will purchase that debt by writing a check drawn on an account that has a ZERO BALANCE. Now, if you or I don’t have enough money in our checking account when we write a check, we get fined. Do it enough times, we go to jail. But central banks can do just this.

Once the money is created, the government just spends it.

In the lending system, there is another way money is created. It is called “Fractional Reserve Banking”, another corrupt, yet legal, practice.

When you go borrow money for a mortgage or use your credit card, you are not actually borrowing someone else’s money. Instead, your bank is creating money out of thin air. They do have limits on what they can create, which is typically 10x the amount they have on deposit. Those deposits are a “fraction” of the outstanding loans that they keep on reserve in case someone wants to make a withdrawal. If too many people want to withdraw, and the reserves are inadequate, word gets around and there is a “run on the bank”.

The problem with DEBT BASED money lent into circulation is that it is lent at interest, and there is no possible way to ever pay the increasing amount of interest.

If I lend you a $100 bill at 6%, and it is the only legal tender available to use, at the end of 1 year, if you were to pay off your debt to me, you can’t! You can give me the $100 bill back. But where will you get the $6 interest? I didn’t print that! The only place you can get the $6 is to borrow even more from me! Its as if the only place you can get money to pay your credit card is by borrowing on your credit card! This is why the system is corrupt, and will eventually implode!

I encourage you to study these concepts. Your financial future depends on it!

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