Money, like any commodity, derives its value from how much of it is in circulation (i.e. from the size of the money supply).
The bigger the money supply (i.e. the total quantity of money in circulation), the more diluted and less valuable £1 becomes.
The reason for this is simple: with more money around chasing the goods and services of an economy, prices tend to go up.
Prices are a consequence of the size of the money supply, and not the other way around. We'll come back to this point.
Now, crucially, the money supply in our monetary system is 95% debt.
Loans, mortgages and the like.
Money in our monetary system is created as debt by banks, out of thin air, whenever a new loan contract is signed.
The money creation process is a simple accounting ledger entry on a computer screen: the borrower's account is credited with the amount of the loan, and, out of nowhere, new money comes into existence.
It is legal counterfeiting, pure and simple.
Note that when the loan contract is signed, it is not only the borrower that comes to the transaction empty-handed, but also the bank.
This is why, for example, the bank doesn't first buy the collateral (e.g. the house) that is pledged and then sell it to the borrower: the bank is also coming to the loan transaction empty-handed.
A loan contract is simply an exchange of promises:
- the borrower promises to pay principal plus interest, and
- the bank credits her account with an electronic accounting entry for the amount of the principal (this is the bank's promise to pay the borrower).
And, out of nothing, and as a result of this exchange of promises, new debt (or 'checkbook') money has been created in the borrower's account. Pure magic.
Note also that the lenders are collecting interest for this 'money' that was created as debt out of thin air.
Of course this new debt money can then be used to buy real goods and services in the real world.
The new debt money immediately dilutes the purchasing power of the money already in circulation and consumes real-world resources.
And that's the 'genius' of the system: the negative consequences of the loan transaction are suffered not by individuals, but by society as a whole.
Now, even more crucially, as loans are being paid back, money gets 'un-created'.
The reverse accounting entry takes place, and the money supply contracts by the same amount.
So why is all this so important?
Well, without debt, there would be no money.
Some people say, naively, 'ok, let's get out of debt and the problems will disappear'.
On the contrary. No debt means no money.
Hence, we are absolutely, hopelessly dependent on total indebtedness being perpetually increased.
We are absolutely, hopelessly dependent on banks injecting bank credit (by giving new loans) into the economy.
If, as now, the banks stop injecting credit into the economy (i.e. if no new loans are given), as the old loans get paid back money gets 'un-created' and the money supply contracts.
As the money supply contracts, there's less money around to be earned, and the borrowers have to compete for a smaller and smaller pie of money (remember, apart from the principal they also need to repay interest).
A deflationary spiral occurs: people postpone buying (as prices are falling), foreclosures and bankruptcies occur at increasing rates, and social upheaval follows.
Note also that if the rate at which the loans are being repaid is faster than the rate at which new loans are given out, then again the money supply is contracting and the authorities are worried about a deflationary spiral.
E.g. see here:
Also note that, as we mentioned, prices are a consequence of the size of the money supply, not the other way around.
When more money (debt) is around (easy credit by the banks), there's more money chasing products & services and the prices rise.
The reverse happens when credit is tight (money supply contraction and, as a consequence, price deflation).
So, if you think that a system in which there is absolute dependence on debt being perpetually increased is a bad system, well, you're not alone.
Here are a few quotes from Paul Grignon's 'Money as debt' site:
"If two parties, instead of being a bank and an individual, were an individual and an individual, they could not inflate the circulating medium by a loan transaction, for the simple reason that the lender could not lend what he didn't have, as banks can do....
Only commercial banks and trust companies can lend money that they manufacture by lending it."
~Professor Irving Fisher, economist in his book 100% Money (1935)
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.”
John Kenneth Galbraith , economist, author, Money: Whence it came, where it went - 1975, p15
"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks."
Lord Acton (1834-1902) English historian
"Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower’s IOU.
Federal Reserve Bank of New York, I Bet You Thought, p.19
"Banks lend by creating credit. They create the means of payment out of nothing."
Ralph M. Hawtrey, former Secretary of the British Treasury
"The decrease in purchasing power incurred by holders of money due to inflation imparts gains to the issuers of money.”
St. Louis Federal Reserve Bank, Review, Nov. 1975, p.22
“The entire world economy rests on the consumer; if he ever stops spending money he doesn't have on things he doesn't need -- we're done for."
Bill Bonner, author, publisher and columnist on economics and money
"With the monetary system we have now, the careful saving of a lifetime can be wiped out in an eyeblink.”
Larry Parks, Executive Director,
The Foundation for the Advancement of Monetary Education (FAME)
"When a government is dependent upon bankers for money,
they and not the leaders of the government control the situation,
since the hand that gives is above the hand that takes.
Money has no motherland; financiers are without patriotism
and without decency; their sole object is gain."
"I wouldn't go to war again as I have done to protect some lousy investment of the bankers. There are only two things we should fight for. One is the defense of our homes and the other is the Bill of Rights.
War for any other reason is simply a racket."
Major General Smedley Darlington Butler USA (1881-1940) from a speech in 1933
"There is nothing left now for us but to get ever deeper and deeper into debt to the banking system in order to provide the increasing amounts of money the nation requires for its expansion and growth.
Our money system is nothing better than a confidence trick...
The "money power" which has been able to overshadow ostensibly responsible government is not the power of the merely ultra-rich but is nothing more or less than a new technique to destroy money by adding and withdrawing figures in bank ledgers, without the slightest concern for the interests of the community or the real role money ought to perform therein...
to allow it to become a source of revenue to private issuer's is to create, first, a secret and illicit arm of government and, last, a rival power strong enough to ultimately overthrow all other forms of government.
...An honest money system is the only alternative."
Dr. Frederick Soddy, Nobelist
author of Wealth, Virtual Wealth & Debt
"When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it."
Frederic Bastiat, 1801-1850, political economist, author The Law
"The entire taxing and monetary systems are hereby placed under the U.C.C. (Uniform Commercial Code)"
US Federal Tax Lien Act of 1966
“The bank hath benefit of interest on all moneys which it creates out of nothing.”
William Paterson, founder of the Bank of England, c1694.
“Banking doesn’t involve fraud, banking IS fraud.”
Tim Madden, monetary historian & consumer advocate
from video by Paul Grignon done for United Financial Consumers (2002)
"Money does not pay for anything, never has, never will. It is an economic axiom as old as the hills that goods and services can be paid for only with goods and services."
Albert Jay Nock, Memoirs of a Superfluous Man, 1943
"Only when the last tree has died and the last river has been poisoned and the last fish been caught will we realize we cannot eat money."
Cree Indian Proverb, unsourced , probably made up by some T-shirt designer but does it matter?
Finally: a new 'Money as debt' video has been released (Money as debt II: promises unleashed).
As usual, it's excellent. It requires attention and a couple of viewings to grasp all the notions, but it's well worth the effort (and honestly, if this isn't worth the effort, what is?).
Here's a link to a Youtube playlist with all clips: