Money​—How Created?

“FEASTING makes you happy and wine cheers you up,” a wise man once said, “but you can’t have either without money.” (Ecclesiastes 10:19, Today’s English Version) But just what is this mysterious thing​—money? Where does it come from?

Long ago man realized that neither bartering nor lugging around metal were convenient ways of doing business. So the ingenious Chinese invented paper money. And in time other nations, too, opted for the convenience of printing paper that was, at least in theory, redeemable for precious metal​—usually gold.

The gold standard, however, had a built-in flaw. It is said that the total value of all the gold ever mined is only about $85 billion dollars (using the old $35/​oz price of gold). Nowhere near enough of the shiny stuff exists to keep up with the frantic growth of population and business.

To illustrate, after World War II the U.S. dollar became the currency of international trade. Billions of U.S. dollars thus came to be in the hands of foreign governments. Claimed one writer: “Already by 1965 there were more dollars in the hands of foreign banks than the gold in Fort Knox was worth.” (Italics ours.) What if the nations all suddenly demanded their gold? So in 1971 the United States ‘closed its gold window.’ Foreign nations could not redeem their dollars for gold, though the United States still maintained huge gold reserves. For all practical purposes, then, the money was backed only by the good faith of the United States government. This threw the international monetary system into chaos.

Money, therefore, is worth only as much as people think it is worth. The more money governments print, the less value people put on it. But the printing presses are not the only source of money.

Out of Thin Air

“You ought to have deposited my silver monies with the bankers,” said a man in one of Jesus’ parables, “and on my arrival I would be receiving what is mine with interest.” (Matthew 25:27) Even in Bible times, bankers knew the art of lending money for a tidy profit and sharing some of this gain with the depositor as “interest.” In doing this, however, bankers are cleverly creating money.

For the sake of argument, imagine yourself depositing $100,000 (or a similar amount of your country’s currency) in a bank. Next is a customer who borrows $10,000 to start a new business. You may figure that your deposit, minus this loan, increases the bank’s assets by only $90,000. But that is not how a banker reasons. Rather than giving the borrower $10,000 in hard cash, the money is usually credited to his bank account for him to draw upon gradually. So instead of the bank’s assets decreasing, the bank’s ledgers show a total of $110,000​—$10,000 created out of thin air!

This figure juggling may give you a headache, but it brings a smile to the banker. In this way banks are able to lend more money than they really have. ‘But isn’t that dangerous?’ you ask. It can be. Especially if a bank lends money irresponsibly. Nevertheless, it is rare that all the depositors and borrowers come at the same time demanding their money. So banks keep enough hard cash on hand to handle their day-to-day business.

Governments, too, create enormous amounts of funds without necessarily running their printing presses. For example, according to the book The Money Balloon, the Federal Reserve Bank of the United States “goes through an obscenely complicated series of bookkeeping entries​—moving numbers around, buying and selling Government securities, making loans, buying securities and agreeing to sell them right back, selling securities and agreeing to buy them right back . . . but when all this activity is analyzed, the Federal Reserve System is creating money out of thin air.”

You, too, may unwittingly create money. The credit card lets you borrow money every time it is used. Checking accounts often let you write checks for more money than is actually deposited. In this way, the supply of money grows​—and inflation is fueled.

The money system is therefore a bubble that could easily burst if people lost confidence in the system. Nevertheless, if money is so easily created, where does it go?

[Picture on page 5]

World currency is no longer backed by gold