Financial Education #8: How Is Currency Created?

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Clearing It Up!

To demonstrate this idea of how currency is created, let's first take the example of how it is done in The United States. Some of us quite flippantly use the term 'currency printing' yet what I aim to explain is how this seemingly simply process actually happens! It all starts with the Government. They create a glorified IOU. IOU is an acronym for 'I owe you' (for sake of clarity I thought I'd add that). This is the government essentially saying, 'I will promise to pay you back the currency you lend me plus some interest on top!' The Treasury, the department in charge of managing all federal finances, facilitates the formal creation of this IOU. This is called a bond.

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The Profitable Middle Men: The Banks

Well recognised banks, such as JP Morgan and Bank of America, will purchase these bonds from the treasury. At this moment in time, the government now owe the banks the interest and principle on the bond, the government have essentially taken a loan out from the bank. The banks will then sell these bonds again onto the Federal Reserve, ofcourse including a premium on those bonds and thus creating a profit. However, this is the vitally important piece of the puzzle that not many people understand.

The Federal Reserve writes a cheque to purchase these bonds from the banks. When the Federal Reserve writes this cheque, they do not have the funds to support this cheque. When you or I write a check, we have to have the funds in our bank otherwise when the other party comes to claim the cheque it will bounce. However, the Federal Reserve gets to write a cheque with a checking accound of zero balance and the cheques are fulfilled on the other side. The aftermath of this essentially fraudulent activity is that the Federal Reserve owns the bond and both the banks and the government have huge sums of currency in their pockets. All of this currency was created from thin air. This currency by the way is the US Dollar. The one that 300 million people have to go out and earn, whilst the Federal Reserve can essentially just type the numbers into the computer and voila! The government now have the currency to spend as they see fit. Simply once again, they have taken a loan from the Federal Reserve and have to pay the loan back plus interest to the Fed. The banks essentially facilitated this trade and took their fee.


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Picking Up The Tab

So, the clear question that is left is 'How does the government pay back the Federal Reserve for the loan that it took out?' The answer is that they don't. You pay it for them. When you go and out and work hard for the dollars that you earn, to feed yourself and your family, there is a time when you have to pay tax. The taxes that you pay pass through the IRS and onto the Treasury so that they can pay the debt that they owe to the Fed. You are picking up the tab for someone else's loan. If you lived in a world where you knew someone who was constantly taking out loans to fund their wild, extravagant and somewhat foolish lifestyle you probably would sit them down and have a heart to heart chat with them. Well, the reality in this situation is that you are the one actually funding this for them. You will be the one who has to pay back the loan that they took out to fund their life. Well, that someone is all governments throughout the world. They get to spend currency on whatever they want like it's going out of fashion and you and I are paying for them to do that through taxation. This is the reality.

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Debt Ceiling Illusion

As much as you may try to get your friend to change their spending habits, history has shown that they will not. All of the government spending is done through the politicians that are elected into power. Their claim is 'Vote for me and i'll give you more free stuff than my opponent'. However, we now know that there is no such thing as a free lunch. The money has to come from somewhere as they are not using money that they have in their pockets. They are using the currency that they have been loaned in the example that I have just explained. This is called deficit spending. Politicians do not care about the financial implications of this deficit spending. They just want to look good and they don't care how much is costs. The economic collapse will never happen on their watch, as long as they keep taking out these loan to fund their programmes.

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Robbing the Wealth of Savers

All of this deficit spending increases the currency supply of the US Dollar. This devalues people's purchasing power over time. The most productive people in society are the ones that get screwed the most. The ones who are diligent with their spending habits and the ones who work to earn their income are the ones who get shafted. This is due to the resulting inflation that happens, robbing the wealth of the people and funneling it to the elites. This system is only possible because we use currency not money.

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Financial education is really important, especially right now. COVID is happening and there are significant health and social reciprocations. Yet it is important to understand the financial implications too and what is going on behind the scenes. Please continue to read my blogs about financial education and crypto as they come out. This is aimed to educate people who know nothing about these topics with the aim of having some protection when an inevitable financial collapse happens.

Currently, if you are new to this, you are not too late. The talk in crpyto is that if you aren't already in you are too late. This is not true. This is not true for gold or silver either. There is still an opportunity to educate yourself and make appropriate decisions for yourself!

Please upvote, reblog, and comment! I look forward to your thoughts on these topics too as I want to get this discussion going! Thank you.


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I wish more people could read your posts and this one in particular.
You are explaining with simple words the world biggest robbery that's brilliant.
Spending habits have to change for us too, the less we feed the elites the better.

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Thank you for the kind words! I am trying to simplify the whole situation for people, giving them full information! It is robbery when you rephrase '50% total inflation over the last 10 years' to 'half of your money will be stolen in the next 10 years'. Thanks again for the comment!

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I miss all the phony worries about the debt ceiling, that was quite a show they used to put on. All of them are a bunch of thieves!

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Quite simply, those in government spend where they like. However, you and me have to 'pick up the tab' for their spending. It's really that simple. Acknowledging the things that governments are spending their money on and then realising that you and I have to pay for it. I find it frustrating.

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To be honest, I wasn't aware that there's a difference between money and currency. Now I sure will be more cautious on my spending habits. It was a great post, both clear and useful. Thanks!

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Yes! The important difference is that Money is a store of value. This means that the supply is limited and low! Thank you, I appreciate the feedback! Please continue to comment and engage!

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Great post. Thank you for explaining that. It's really nice to see some stuff written with the less financially aware in mind.

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Thank you, you are welcome. Financial Education is going to be vitally important over the next 10 years!

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Funny thing is inflation turns out to be the fairest kind of taxation. It affects everyone equally. That is exactly how most cryptocurrencies sustain themselves. They tax everyone in the network equally based on how much stake they own.

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That's not necessarily true. It affects all cash equally but many of the wealthy don't have lots of cash. They own lots of assets. I suppose inflation is a form of tax, yes! Thanks for commenting!

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Sorry, I should have phrased myself better. Inflation is the fairest form of taxation on currency. Everyone's dollars or pounds or crypto gets devalued equally without any chance for anyone to cheat the system.

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Great post!
You put everything that everyone should know about banks in just one post!

Thanks for the info!

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That was the aim! To really simplify how banks create currency and the resulting impacts of inflation! Thank you! Please continue to comment and share and upvote!

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When we are to inflation and supply/demand please check my last post about Ampleforth, let me know what you think!

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I live in a country where paper Mony is worthless and also they printed digital money from knowhere but everything is fine.

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All FIAT currency is worthless. They are supported by confidence but people don't realise the hollow foundation that it is! Which country are you living in? Thanks for the comment!

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I don't home money in a bank is impossible because inflation destroy its value, I live in Venezuela so here the economy is like a joke.

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Excellent. I would love to share this with all my friends, yet - sadly - experience has taught me that they will not read it :(
It seems that most people HAVE to learn the hard way!

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Please do share! I've recognised that too with people close to me, lack of curiosity and humility too perhaps? Comes from school where the dialogue essentially was 'Be quiet and you learn this and only this', no room for curisouty and critical thinking. I don't want those close to me to learn the hardway, I agree with you! Thanks again for the comment I appreciate it!

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Interesting article but i think the premise of how we start off with currency or the idea is wrong from the beginning. As you bring out in the article essentially its this shellgame workaround of politicians spending money that doesn't belong to them. Now makes sense why the fed is always going to be appealing to a politician. Even Donald Trump talks about the Fed Reserve gets to DC we don't hear so much as a squeak out of him about the Fed he goes deaf as well.

So this makes sense because as long as the Fed exist politicians don't have to directly ask citizens for money to spend on crap. Politicians come to DC to wield real power not pretend power. That entails spending money. So it doesn't make sense for them to deny themselves the most powerful thing in their arsenal writings checks they themselves didn't earn. They never going to give up that power ever. Americans don't demand it. They didnt hold Trump accountable. Those 70 americans did wht they always do covered for Trump and we are worse off as we were.

I think to get this right. In an economic system where everyone steals from everyone since the dawn of time. We have to start from a value system that says every citizen on earth is worth x amount of dollars and guaranteed a certain percentage of the earths resources as long as they exist forever and ever. As long as some type of alternative system exist call it capitalism.. call it socialism.. there will always be a class of people that can steal from the others.

As far as i'm concerned nobody has earned anything. The earth was here bearing resources when you came here. Even if you say you earned something through labor output if you go back far enough it generally spells out you stole it from someone else through war or conquest. So you're still no better than the governments that steal from you. So why should the world care about your earnings.

No currency systems is a weird practice that no animal in the animal kingdom does but human beings and they do it horribly. We exist as humans we all inherit the resources of this earth point blank. Now i'm not saying that a person can't after a point of that inheritance go out and have the incentive to achieve more .. Not talking about a cashless society or a society where there is no incentive to do anything. We can have both. There can be a global inheritance and still incentive to achieve and grow and evolve. Again if people wanna talk about theft. It's always been theft perpetrated on one group over the other. Achieving resources and goals unjustfly and unfairly. So as long as injustice exist in the world why should we be entitled to any. So we need to reset this right.

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It could be fair to say that Politicians launder the FEDs currency for them! And we have to pick up the tab through future taxation...

I understand that we are stewards of the earth, yet there are definately things we earn. Think of a days work as a labourer, moving bricks around, digging wholes or laying down electrics. This wasn't stolen from the earth of anyone else as you say.

Currency is a beautiful invention, it's just in the hands of governments and is corrupt, as I have shared in my posts...

With BTC and other cryptos they are unseizable, due to the private keys, so there will be a lack of theft as you seem so worried about!

Interesting comments, thank you!

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Well i most certainly do believe one can actually earn without taking. It's just difficult to find examples where that has occured. I recall reading an article about how several nations agreed that no one could own the moon. Otherwise nations could just already start carving out territory on the moon.

On earth it mostly played out like i'm here working this land. I harrow this land and i work this land. Someone comes up and they tell me if i don't give them the land they will take it by force. Or in war they just go in and fight a war for your resources. In other other words they just going to take it. After they take it they then start to harrow and work the land and say they earn everything that comes forth from it.

However can you see a philosophical issue with this. Which brings me back to my original point. Yes it is true we can earn and figure out ways to tax the land and still find ways to take from the peoples labor or resources or something. However if we agreed by some virtue of you have the right as a human to occupy the space you're on and have the right for this earth to supply your basic needs and this be an agreement unchallenged as the best approach.

Alot of issues can be avoided. Yes crypto is a step in the right direction. However pretty much anything generated outside of you can be manipulated or stolen including crypto. In some cases even worse in crypto. Price manipulation .. wash trading.. scams.. centralized exchanges. All of these things can have a big impact. if the value is agreed to be produced in you to a certain degree then to me that makes more sense

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Appreciated @localgrower . I am interested to your point state that "Politicians do not care about the financial implications of this deficit spending. They just want to look good and they don't care how much is costs."

My understanding is that politician or government should take care of their people in terms of financial, economic, and wealth . Money or currency is just a tool and should not deteriorates and jeopardizes people wealth, isn't it ?

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Appreciated @localgrower . I am interested to your point state that "Politicians do not care about the financial implications of this deficit spending. They just want to look good and they don't care how much is costs."

My understanding is that politician or government should take care of their people in terms of financial, economic, and wealth . Money or currency is just a tool and should not deteriorates and jeopardizes people wealth, isn't it ?

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(Edited)

Great write up. I think entire concept of debt, FED, and taxes are so outdated with the invention of blockchain. I think that's why governments are so scared of it. The old system benefits so few where I see blockchain helping the masses. At some point the government will just keep printing money and de-value their fiats into oblivion.

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Covid19 đã ảnh hưởng quá lớn đến nền văn hóa và kinh tế nhân loại, rồi đây tôi nghĩ trung quốc sẽ đứng nhất toàn cầu, nó đang tăng mạnh mẽ, tôi không biết thế giới sẽ đi về đâu, ngân hàng thế giới sẽ núp sau cái bóng của ông lớn nước nào, điều đó tương lai không còn xa, chúng ta phải chuẩn bị tinh thần.

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