Monetising debt

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
Publication - I Bet You Thought
Page 19


Most people believe that the amount of money in circulation increases due to the government creating and then issuing some more of our "national currency". However, currency (i.e. notes and coins) only makes up about 3.5% of the Broad Money supply - as shown from the RBA figures below:


RBA-currency percent

Let's have a look at another RBA graph - in order to get a further hint on the causative factor for changes in our money supply.

rba - credit and money


In the graph above you can see a near-perfect correlation between Broad Money and credit.  Not yet convinced that credit and money are just 2 sides of the same coin? Below is a quote from someone who should know:


The bank can create and destroy money. Bank credit is money. It's the money we do most of our business with, not with that currency we usually think of as currency.

Mr Marriner Stoddard Eccles
Former chairman of the Federal Reserve Board


Note that when an individual obtains "credit" from a bank and spends that money, he is now "in debt". Hence "credit" and "debt" are 2 sides of the same coin. When we say that "money is based on debt" or that "bank credit is money" - it means the same thing.

In plain English - money only comes into existence once it is borrowed. Sad but true.