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DEBT MONEY

A debt-based monetary system is an economic system where money is created as a liability to the party issuing the money or as a debt to the party receiving the money or as a debt to both the issuing party and the receiving party.

This form of money is called debt or debt-based money because some one must have a debt for the money to exist or before the money can move into circulation.

An example of money that puts both the issuer and the user into debt is the check-book (demand deposit) money that we use today “All bank deposits are a form of credit. Basically, they represent amounts owed by banks to depositors. They come into existence by an exchange of bank promises to pay customers for the various assets which banks acquire—currency, promissory notes of business, consumer and other customers, mortgages on real estate, and Government and other securities.” The Third Edition of the Federal Reserve System Purposes and functions page 6. We the users can only move this money into circulation by going to the bank borrow the money, by signing a promissory note, promising to pay the money plus interest back to the bank.

An example of debt money that puts the issuer into debt was the ‘Continental’ issued by the Continental Congress. These Bills stated: “This bill entitles the Bearer to receive Spanish Milled Dollars or the value thereof in gold and silver…”, because the bills were payable on demand they were a debt upon the Continental Congress and because they were spent into circulation they were not a debt to the users.

An example of money that doesn’t put the issuer, only the user, into debt is the coins we use today. The U.S. Treasury takes combinations of copper, zinc, manganese brass and nickel, stamps these metals into coined money. This procedure doesn’t create a debt to the treasury but because the treasury only sells them, taking only bank created credit money for payment we the users have to have a debt before the coins can move into circulation. Bradford E. Cooper, Associate Director, Manufacturing United States Mint and Alan Keller, Director, Office of Public Correspondence, Department of the Treasury If the U.S. Treasury would simply coin up and coins and spend them into the circulation there would be no debt therefore we would have wealth (monetized production) money.

Some argue that since debt and the interest on the debt can only be paid in the same form of money borrowed (bank credits) the total debt (principal plus interest) can never be paid unless more money is created through the same process. Example if 100 credits are created and loaned into the economy at 10% per year at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. When, “the actual creation of money (ALWAYS) involves the extension of credit from private commercial banks.” Russell Munk, assistant general council for the U. S. Treasury the banks can only loan the principal, it is not possible to create the money to pay the interest with that same loan. So how is the money created to pay the interest, “the money to pay the interest on loans comes from the same source as all other money” Russell Munk, U. S. Treasury, therefore another loan must be make to some one before there is enough money in the economy for the first borrower to pay his total indebtedness to the bank. “The money that one borrower uses to pay interest on a loan has been created somewhere else in the economy by another loan”. John M. Yetter, U. S. Treasury

Others argue that there is in fact no mathematical necessity for the money supply in a debt-based system to grow, since the interest portion of loan payments is not taken out of circulation, but goes into the lender’s account, where it can be spent back into the circulation and eventually be used to pay off some loan principal. It does not increase the money supply.

The reality is that when a bank loan is repaid, the money is extinguished, in a reverse process by which the money was originally created, “Money is created when loans are issued and debts incurred, money is extinguished when loans are repaid” John B. Henderson, Senior Specialist in Price Economics, Congressional Research Service of the Library of Congress. Here are the facts today all money is created as interest bearing loan from the banking system. This increases the money supply by the amount of the principal, time and interest make the debt grow it doesn’t make the money supply grow. The money needed to pay the interest can only come from another interest accruing loan. When one the first loan, total principal and interest, is pay the principal is extinguished and that part of the money supply destroyed the interest part of the goes to the banking system as profit but the interest debt is not destroyed it is simply shifted to another borrower and goes right on accruing interest. Even if the banking system would spent all the interest profit back into the economy the money supply would not have expanded beyond the total of the loaned principal with the interest growing larger all the time.

Robert H. Hemphill, credit manager of the Federal Reserve in Atlanta stated: “If all the bank loans were paid, no one would have a bank deposit and there would not be a dollar of coin or currency in circulation. This is a staggering thought. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. When one gets a complete grasp of the picture the tragic absurdity of our hopeless position is almost incredible, but there it is. It (the banking problem) is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.” The defect in the money system is that what we use for money represents how much we owe at interest to the banking system, a debt that can’t be fully repaid, and not how much wealth we have produced! Wealth comes in many forms but it is always created by applying ideas and labor to natural raw resources and producing something of value to someone. Money should represent what we have produced not what we owe to the banking system.