Module 2 of 8 Money is Debt

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In today’s module, we’ll discuss the idea of money as debt and the creation of the Federal Reserve “Bank”.

Module 2 of 8: Money is Debt.

When banks create money out of thin air, or in fact by keystrokes on a computer keyboard, they are in fact creating a debt. The key factor here is that the debt incurs interest, which must continue to be paid until the debt is paid off.

Put simply then – today worldwide, money is debt. Money has no backing, just the “faith and credit” of the issuing government. This is what is known as “Fiat” currency. Fiat derives from Latin meaning “let it be done”. So, in the case of money, a government decree requiring payment of taxes exclusively in this currency. i.e. we say it’s money so therefore it is.

As long as citizens continue to believe it has value it does. You can’t go to the bank and ask to swap your $100 note for an equivalent amount of gold as was the case prior to 1933 (we’ll get to that later). In fact if you did, we’re sure the person behind the counter would give you a strange look indeed.

Money is effectively created out of nothing by central banks, who in turn lend this to commercial banks. As already explained the banks then take this sum of money and lend it many times over to businesses and consumers. As long as there is always another borrower then everything is just hunky dory.

The way the system works means that once the lending stops the house of cards will come-a-tumbling down. We saw a few cards wobble in October 2008; the house is still standing but it’s not looking too stable.

A Monetary Crisis?

The term credit crisis or financial crisis is used in the mainstream press to explain the current terrible state of the world’s economic system. As in, there was too much credit i.e. people have borrowed too much. Or there isn’t enough credit i.e. the banks are in bad shape so they aren’t lending to each other or anyone else.

However, as we’ve just explained Money is in fact Debt.

So, too much debt actually means too much money. Why is there too much money? Because our current system, the world over, allows central banks to create as much money as they see fit.

So what we really should be talking about is a monetary crisis. The seed of the current crisis is in the structure of the world’s monetary system.

How Did it Get Like This?

If you explained the world’s financial system to any teenager the odds are they would think the way the system operates is crazy. You’re probably thinking the same thing right this minute.

If you were trying to create a system that could self correct and ensure things didn’t get too far out of whack, would it look like it does today? The answer would obviously be no. So how did it get like this?

We need to cast our gaze back to the start of the 20th century to answer this question. So, we’ll attempt to do the impossible and outline a century of monetary history in just a page or so….Wheww here goes….

Creation of the Federal Reserve

The Federal Reserve is the organisation that controls the money supply of the USA and (as you’ll read shortly) by extension, the supply of money the world over too. Ironically the Federal Reserve isn’t a federal agency, but rather a cabal of private banks – and it doesn’t have any reserves!

The Federal Reserve was created in 1913. Supposedly born out of the need to stop banking collapses and protect the average “man in the street”. However if you dig deeper you’ll discover that this wasn’t the case at all.

The “Fed” was actually born out of the desire for control over the USA’s money supply. In fact an oft repeated quote is that of the founder of the Rothschild banking family, Baron M.A. Rothschild, “Give me control over a nation’s currency and I care not who makes its laws.” The Federal Reserve has the monopoly on printing money and therefore creating profits at will for it’s owners, who remain the descendants of a number of ultra rich banking families such as the Rockefeller’s, Morgan’s, Warburg’s, and Rothschild’s.

The Creature from Jekyll Island: A Second Look at the Federal Reserve

This in itself is a story on its own and we’d recommend you read “The Creature from Jekyll Island” by G. Edward Griffin to get the real story on how and why the Fed was created.

(Below is a video interview with author G. Edward Griffin if you’d like to learn more on the formation of the Fed but don’t want to read a whole book.  The interview starts at 4 min 08 sec.)

The Feds supposed purpose was to maintain “price stability”. The Great Depression of the 1930’s was the first indicator that maybe it wasn’t doing such a great job!

In 1934 in the middle of the Depression, the Roosevelt administration followed the lead of other nations and sought to end the depression by devaluing the dollar. It did this by mandating that all private gold holdings be turned into the government in exchange for $20.67 per ounce. It then devalued the dollar to be worth $35 per ounce of gold – Or, if you were well informed enough to hold gold outside the US, an instantaneous 69% increase in the price of your gold.

Towards the end of WWII in 1944 a meeting at a resort in Bretton Woods, New Hampshire, USA, saw the creation of the IMF and World Bank, along with the US dollar becoming the world’s reserve currency. That is, the currency used by all countries to settle transactions. The US dollar also generally makes up the majority of most countries foreign currency reserves. This gave the US a number of advantages…

Every major commodity is priced and traded only in U.S. dollars. This has helped to create a constant demand for the American currency, as traders must hold U.S. dollars to purchase commodities.

It has also allowed the US to borrow money at very advantageous rates due to the larger market for US dollars.

For their part of the bargain, the US government guaranteed other countries central banks that they could sell their US dollar currency reserves at a fixed rate for gold of $35US per ounce. Other countries fixed their exchange rates to the $US and therefore had a fixed value in terms of gold too. This restricted governments’ ability to inflate their money supply through excessive printing of paper money, as this would result in a change in their exchange rate and therefore a corresponding outflow of gold from their reserves.

However, this also required the US to therefore maintain the $US to gold value ratio. But did they? Silly question really……

In Module 3 you’ll find out what happened next. You’ll also learn what the possible next development in the “money game” might be…

And remember you can email us at if you have any queries whatsoever. We guarantee a response.

Remember knowledge is the key to protection and profits!

David Deutsch and Glenn Thomas


Gold Survival Guide

Disclaimer: We are not certified investment advisers and you should not construe what we write as personal investment advice but rather information of a general nature and as a basis for you to conduct further research.

One thought on “Module 2 of 8 Money is Debt

  1. Pingback: How did we get where we are today? | Gold Investing Guide

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