The Monetary Economy: An Imperfect Model (Part I)

By Akhilesh at 12 March, 2009, 6:49 am

All human beings for majority of our lives are governed by one major factor “Money”. It has been built into our psyche since childhood that money is going to govern the kind of status you have in the society and most importantly money is going to be the measure of your wealth.

So all our actions, since the day we get this thought engrained into our human system, get governed by this factor. Our parents send us to the best of schools, colleges and higher education colleges so that we can earn money later on. Simple decisions like taking Science or Commerce in high school are dependent on the demand of engineers or CA’s prevalent in the market at that time. Once we are ready to be graduates from the college, the same question is asked in a different style, “Is course kee kyaa value hai. Isko karne ke baad job guarantee hai ki nahin?”

The irony of fact is that we have taken this “money” factor in our lives for granted. Nobody dares to ask this question where does this money come from? I think this is the most important question to be asked since we all have become dependent on this factor but seldom have I seen anyone questioning it.

Anyway my exploration to understand money goes back a few years when I landed up with first job of my life. I was perplexed by the cycle that money followed. The money I used to get as salary used to flow in the following manner:

Money Inflow: Money Received as Salary from a bank
Money Outflow: Spend on necessities and pleasure and savings, if any, deposited in the bank
My expenditure becomes income for the recipient and he spends or deposits in the bank and the cycle continues further. Hence, all money should end up in a bank.

So the questions in my mind (And I asked one of my friends who can bear testimony to the above story, that how this money is created. My friend is a finance expert) were why I was receiving the same money again and again. How is this money created? What is the underlying value of the paper money that we use?

I was not satisfied by any answer that I received. Not even by the multiplier effect theory of Keynes (with due respect to his work). Multiplier effect would tell me how banks grew the money they received from the existing deposits. But where from these existing deposits were generated? They should have been generated from somewhere?

Finally a document issued in public interest from the horse’s mouth (read: US Federal Reserve comes to my rescue). This document called ‘MODERN MONEY MECHANICS’ is a Federal Reserve manual that explains the flow of money and creation of money in the economy. This booklet suggests how this initial deposit comes to the bank (Please refer to the book “Web of Debt” by Elen Hodgson Brown to understand this in detail.). It says the initial deposits get created by issuing bonds to the government and then getting that much amount of money to be printed in the mint. Thus practically the initial money gets created from debt and then this money is created to provide for loans and advances for various works of the country and creating further debt in the economy. Also if we intently compare the charts of the US money supply and the US government debt, the graphs run parallel to each other in the same upward direction. (Watch zeitgeist addendum to get into details). This directly means that as the money supply in the economy increases the debt increases proportionately.

So the money that gets generated in the economy creates more and more debt and we get entrapped into the cycle of borrowing and repaying loans through our entire life. It is in the interest of the banks and the government agencies to keep the public entrapped in this whole vicious cycle as it gives them direct control / power over the economic condition of the population of the country. All transactions are routed through banks by the money that is created in banks for the money to end up in the bank.

This whole system is supported by another equally disturbing system called capitalism.

More on capitalism in Part 2 of the series.
(To be concluded)

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