Summary of Money as Debt Essay

The “Money as Debt” was created by Paul Grignon in 2006. It is the most fascinating video I have ever seen. Moreover, I am just amazed how much I have learned in just 47 minutes. This video describes how basic banking system works and answers the question where the money comes from. Years ago, bank used to create money only if they have the real gold with them or someone deposits the gold to bank. But this is not how the bank operates today.

Nowadays, banks create money as long as we, as individuals, borrow it and give the promise to return that money back.

So, today, money is backed by the loan or mortgage. However, bank loans money that does not exist. Furthermore, as soon as people realize that bank creates money out of nothing, a new legal regulation is invented to protect their rights, which is called “9 to 1 Fractional Reserve System”. It limits how much money the bank can create. Basically, if the bank has $1K cash in hand, they can loan out up to $9K to borrowers based on the 1:9 fractional reserve system regulation.

However, it does not really limit the bank to create money up to $9K.

In reality, they can create the money up to $90K which makes it 1 to 90 ratio. For instance, if the bank started with $1K cash in bank, it means that the bank can loan up to $9K to all of us. So, let’s assume that Person #1 takes the loan of $9K to buy a car from Person #2. Based on the person #1’s promise to pay the money back, bank will create $9K cash and loan it to person #2. The tricky part is the Person #2 will then deposits $9K to the bank. Based on the 9:1 federal reserved regulation, the bank can then reserve $900 ($9K/10) and loan out the rest which is $8100 ($90:$8100 =1: 9).

Moreover, it moves on to the next loan transaction until the bank can’t reserve money anymore. At that point in time, the bank will have total of $10K cash in hand and the total of $90K loan has been created. This video does a great job explaining how it is all happening. Now it became obvious to me that the bank creates money out of each loan transaction. With just $1K, the bank can somehow create extra $99K ($9K + $90K) out of all the loan transactions. So, $1K somehow magically becomes $100K ($1K+$99K).

Assuming that $1K is backed by Gold, then $99K is now backed by loan. It seems like the banks only create $9K but in reality $99K (x10 times) of money has been created out of nothing. Therefore, bank can create as much as money people can borrow. As long as new loan agreement is signed, brand new money is created! As explained in this video, the money supply to the economy is equal to the total amount of loan principal. However, when the borrower pays back to the bank, he is paying not only the principal but the interest of the loan.

Additionally, the total of money that circulates in this economy is approximately equal to the total of loan principal. So, in order to sustain this monetary system, more debts need to be created to make sure the system have enough money supply to pay back the loan interest. However, when more debts are created, more debt interests are created too. Thus, more money the borrowers owe. Finally, what I learned from this video is fascinating and scary at the same time. I am sure that this system most likely will collapse one day, and who knows what will happen to us, regular people.