Investing Fundamentals

Money History: The Creation Of Money

Money History

We all need and use money nearly every day of our lives but do you know where it comes from? Today the guys cover payment history, the creation of money and how it affects our economy.

Listen to the show every Monday, for free:

The IOU Economy

You can’t talk about the creation of money without first talking debt. As most of us might think, money was created to make paying for things easier, but that is not the case according to the book Debt by David Graber. The exchanging of goods was always based on debts from the beginning.

Let’s say a caveman needed some berries. He wouldn’t go to his neighbor with two goats and try and trade for five bags of berries. Instead, they would give two goats expecting the other person to repay them at a later time. Their economy was not quantified by money but debts to each other. Think about it as using ious like a currency.

The use of money came about during war, and new empires were being created. There needed to be a way for soldiers to buy the things they needed in other lands without owing a debt.

A Brief History Of  The U.S. Monetary System

In the United States, dollars used to be backed by some amount of silver or gold, but now money is not supported by anything except faith.

Let’s start with the Panic of 1907, a financial crisis that took place when the New York Stock Exchange fell almost 50%. In the course of the three-week period market collapsed, stock prices tanked, and there was a massive run on the banks.

The Treasury provided over $30 million in aid to the situation, and with the help of J.P. Morgan and others worked to channel money from healthy banks to weaker ones bring confidence back to the financial market.

The aftermath of the Panic prompted the created of the Owen-Glass Federal Reserve Act in 1913. You guessed it; the Federal Reserve System was created. The Fed is NOT government owned but a federally sponsored banking cartel. It’s stock is held by member banks, and it’s licensed to lend money into existence.

At this point, we were still backing out money with gold, but one disadvantage of a gold standard is that the size and health of a country’s economy are dependent upon its supply of gold, not the resourcefulness of its people and businesses.

So, in 1933 Roosevelt takes US citizens off the gold supply. The Fed seizes all the gold, and exchanges are for 11 billion dollars in currency out of thin air. Yes, it’s like magic.

After the wars, U.S. keeps increasing dollars to gold ounce ratio until Nixon closes the gold window in 1971, which removes the monetary system’s last physical limit. All global money is unbacked. Now nothing requires U.S. Dollar to remain the reserve currency, and anything does not back it.

Every economics textbook will tell you that money evolved to make the barter system more efficient because people were tired of chopping goats into quarters to pay for people to mow their lawn.

Tweet This

Get our best money lessons:

How Money Is Created

It is pretty simple. The Fed creates money out of thin air in exchanged for government debt (bonds and notes). Let’s say Company X is asking the Fed for ten million dollars. All the Fed has to do is add a booking entry and POOF! A check is written out to the company, and the Fed get a bond.

Only 3% of our currency is paper money and coins. The rest is all just bookkeeping. The U.S uses this debt-based money system so when money (debt) is created interest needs to be paid. To pay this interest, the money supply has to keep being expanding to perpetuate the modern banking system.

At a minimum, each year, enough new money must be loaned into existence to cover the interest payments on the previous years. Each and every year, it must grow by some percentage. By design, it’s exponential, and the amount of debt will always exceed the sum of money. This causes inflation.

How Effects You

From Colonial Times to 1973, U.S. created 1 trillion dollars. In 2008, it created a trillion in 4.5 months. We keep creating money quicker and faster and so does inflation. The problem is income rates can not keep up with inflation and it eats away at people’s savings.

Every time a new dollar is created it takes value away from existing money. If you keep your money in a savings account, the interest you are gaining will never outpace inflation making it worth less and less.

The money systems require you to subject your money to risk, or it will lose value. Man feel investing in the stock market is too risky, but Inflation makes cash a riskier investment.

Show Notes:

Debt – Book by David Graber

U.S. History of Money

Video On Money Creation

Fractional Reserve Model

Modern Money Mechanics

What's next?

learn podcast popular toolbox search