What money is

A friend pointed me to this film about what money is. I’ve known since high school how banks create money, but I’ve never thought it through to its logical, and somewhat worrying, conclusion. Well worth watching I thought.


Thanks alot for the link. I’ll make sure everyone I know sees it, this is the kind of stuff everyone ought to know, but doesn’t.

I’m sure to have nightmares tonight though…


I’d also recommend Murray Rothbard’s book ‘What Has Government Done to Our Money ?’. Paul Grignon’s may be right that today money is debt but it has only become this way by the nefarious actions of politicians over several centuries.


When I first read about this I was pretty worried too but have since done some more research and have come to the conclusion that this system, while not perfect, is the main reason why developed economies function so effectively.

These lending activities are based on the “Real Bills Doctrine”, the concept that a real bill, that is a promise to pay an amount in the future that will definitely be met, has as much value as the money itself. Every time a person borrows money they take the cash and write such a bill. The bank loses $x in cash and gains a promise for $x. The borrower gains $x in cash and writes a promise to pay $x. Note that neither party has gained or lost any assets. There is no net transfer of value, only liquidity is transferred. In return for providing liquidity the borrower pays interest.

The bank itself has not gained or lost any assets from this transaction as long as you are able to repay. Their assets are now less liquid (more promises, less cash), but as long as they have sufficient liquidity to manage day-to-day trade they can continue to lend without any net change in the value of the dollar.

If you think in terms of paying interest for the use of artificial money then it sounds like the banks are ripping you off. If you think in terms of liquidity of assets then it makes sense - the bank as a large organisation pools assets and maintains a buffer of liquid assets. As such they can afford to provide immediate, liquid assets in return for good promises to repay.

Obviously this needs to be regulated to ensure that they provide this service safely since failure could damage the economy severely, but fundamentally this is a useful service. It is well known that pooling random fluctuations decreases the overall variance and that two smaller organisations with independent assets will need more liquid assets than the combination of the two sharing assets. By making loans available banks allow small businesses to operate with lower reserves of liquid assets, prevent those assets from pooling and improve efficiency across the economy. Anybody can get as much money as much as the banks think they will be able to repay, making it easy to start businesses and make up-front investments.

Things get a bit more complicated once the possibility of people defaulting on loans gets too high. Fundamentally, though, it boils down to this. Yes, money is artificial, but it has value in our system. When you take out a loan, do it if and only if you are willing to gain immediate purchasing power to the value of $x in return for $x + interest in the future.



What you say is true and I agree that the service that banks provide is necessary and largely good. However, what feels wrong to me is that:

  • money is debt,
  • the amount of money owed (including interest) is larger than the amount of money that exists, and most importantly
  • the creation of money is controlled by bankers that aren’t elected nor answer to the public.

To me this suggests that the current financial system needs an overhaul. It might very well be that the best we can come up with is to continue like we have, but with stringent regulation in place. The first step would be to highlight the characteristics of the current system and I feel this film does that fairly well.


If it makes you happier, don’t say that money is debt, say that money is deposits. It’s the same thing, after all. (Or maybe just call it co-deposits :-)

While I liked the first half of the movie, I felt the second half was full of speculative conspiracy theory stuff, and not very well founded. For example, the claim that money should represent value. If I make a promise to my bank of paying $N every month for Y years, how is that not a “value”? Since credit is not a value, is it only physical objects? How about labor? Intellectual property? Perhaps Paul G, instead of preaching about the need for others to think about what money is, should do some thinking himself about what value is?

And about the lenders accumulating all wealth - well, looking at bankers today doesn’t seem to corroborate it. Seriously though, the difference between loan and deposit interest doesn’t accumulate, the banks spend it on wages, equipment, services, or shareholder dividends.

I’ve no idea how anybody would think that an interest-free economy would be supposed to work, since it seems to require people to risk capital for no benefit. Looking at history, it seems any time a culture allowed for interest it lead to growth and domination. Is there any example of a working, interest-free economy? (Oh, I forgot, it’s being choked by the nefarious cartel of international bankers.)

Anyway: If anybody knows a response by somebody who actually understands these things, do post it! I could only find reviews by obvious fanboys/girls - I’d really like to read a more critical view.


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