Where does money come from?

Blogger Rodger Mitchell I disagree on many things, but we agree (mostly anyway) on economics. I’d like to paraphrase one of Mitchell’s posts here, and add some illustrations.

The topic is U.S. government finances, and the nature of money. Mitchell and I say that the U.S. government creates its spending money out of thin air, simply by making ledger entries. And the government likewise destroys money (i.e. sends it back into thin air) by making ledger entries. Therefore the U.S. government has no need for tax revenue.

This fact annoys people who are programmed to think of money as physical and limited, and that only physical money is “real” money (even though no money has ever been physical, just like the number “2” has never been physical). Because of people’s programming, they believe the lie that federal social programs are “insolvent,” and that the U.S. government has a “debt crisis.”

Here’s Mitchell (paraphrased)…

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

The federal government is comparable to the board game Monopoly.

Monopoly generally involves several players plus a “Bank,” which, like the U.S. federal government, is Monetarily Sovereign. That is, the monopoly Bank never needs to run short of dollars.

To play the game, participants buy and sell Monopoly real estate, and they charge each other rent on the properties they buy. The winner is the player who gains the most Monopoly dollars.

The purpose of the Bank is to provide the money for the game, and to sell the real estate properties to the players. The Bank is a corollary to the U.S. Treasury.

Imagine that you and three friends want to play Monopoly, but when you open the box you discover that there are no Monopoly dollars inside.


 

 

 

 

 

 

 

 

 

 

 

 

No problem. You simply draw four columns on a piece of paper, one column for each player. The Bank then provides each player with a given amount of Monopoly money (say 5,000 Monopoly dollars) by writing the number “5000” at the top of each column.


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thus, the total Monopoly “economy” would consist of 20,000 Monopoly dollars.

As the game is played, the players receive 200 Monopoly dollars from the Bank each time they pass “GO.” Each time a player receives money, that amount is added to his column. Of he must pay money, that amount is deducted from his column.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Where does the Bank get the $200? The same place it got the 20,000 start-up dollars: out of thin air. The Bank, like the U.S. federal government, creates dollars by writing numbers into each player’s column (i.e. their bank accounts). The Bank has no source of dollars other than the rules of the game.

At various points in the game, players are required to pay money to the Bank, either for properties, for fines, or for taxes.

Let’s say a player must pay a $100 tax to the Bank. In that case, $100 is deducted from that player’s column.

 

 

 

 

 

 

 

 

 

 

 

Where did the $100 go? It simply disappeared. In effect, those 100 tax dollars were destroyed. The Bank itself has no column. This is exactly how federal dollars work in the real world.

If this bothers players who are accustomed to double-entry accounting, then we can create a separate column for the Bank, and we can add the 100 tax dollars to the Bank’s column.

 

 

 

 

 

 

 

 

 

It would make no difference to the game whether or not we make a column for the Bank. The Bank is not part of the game “economy.” And since the Bank has the unlimited ability to create Monopoly dollars from thin air via ledger entries, there is no way to determine how much money the Bank “has” at any moment in time.

Whether or not the Bank has its own column has no effect on the Bank’s ability to create money via ledger entries. The Bank can be said to have zero dollars, or infinite dollars. Thus, when a player sends tax dollars to the Bank, this does not affect how many dollars the Bank has available to spend.

Similarly, the U.S. Treasury is not part of the U.S. economy. The U.S. Treasury, like the Monopoly Bank, creates dollars at will by spending dollars into the economy. That is, by crediting bank accounts (i. e. by simply changing the numbers).


 

 


 

 

 

Any U.S. dollars in the Treasury’s “column” are not part of the U.S. economy, and are not part of the economy’s money supply. Only dollars in the economy (i.e. in the players’ columns) are part of the money supply. So, like the Monopoly Bank, the U.S. Treasury can be said to have zero dollars, or infinite dollars. It makes no difference.  And the tax dollars you send (or don’t send) to the Treasury have no effect on how many dollars the Treasury can create and spend via ledger entries.

Although the U.S. Treasury does keep accounting records, these records do not measure the Treasury’s ability to pay its bills. The records don’t measure what the Treasury “has,” because what the Treasury “has” is irrelevant.

So take your pick. The U.S. Treasury either does or does not destroy the tax dollars that you send it. Either way the tax dollars affect nothing. The Treasury can create money forever, whether or not we pay tax dollars.

If the Treasury’s balance sheet is irrelevant, and federal tax dollars don’t fund federal spending, then why do we pay taxes?

[1] Inflation: The Value of a dollar = Demand/Supply. If the Supply goes up more than demand, the value goes down. We have inflation. Taxes reduce the supply. However, interest rate increases, which increase the demand for dollars, are the more effective, anti-inflation approach used by the Federal Reserve.

[2] Control: Taking tax dollars from specific segments of the economy is one method that Congress uses to control the economy. This approach has been perverted by business interests that have bribed Congress to create tax loopholes.

[3] Politics: Very rich people pay Congress to widen the gap between the rich and the rest of us. The tax code is designed to do this, as the vast majority of taxes are effectively regressive. At the behest of the rich, Congress levies taxes to widen the Gap, and spends money to get votes.

In short, you pay tax dollars to the U.S. Treasury, which has no need or use for those dollars. Though the U.S. Treasury keeps track of the dollars in balance sheets, the dollars do not affect the Treasury’s ability to spend.

So do these dollars, which have no value and are not part of the money supply, actually exist, or have they been destroyed?

The question is one of semantics, having no economics purpose. I vote for “destroyed,” but if you want to say these useless dollars exist, I won’t quibble.

End of paraphrased blog post.

++++++++++++++++++++++++++++++++++++++From this we see that deficit spending is the process of adding money to the ledger columns by changing the numbers. Taxation is the process of removing money  from the ledger, again by changing the numbers. In this way, money is added to the economy, or taxed out of the economy. The U.S. government can no more become “insolvent” than our Monopoly ledger can, or a sports scoreboard can become “insolvent” of points.

U.S. federal politicians push austerity (i.e. push deficit reduction) to remove money from the economy, and thereby make you poorer. Politicians do this in order to widen the gap between you and the rich, who get most of their money from speculating in the markets. That is, rich people get their money from Wall Street (i.e. the financial economy) while the rest of us get our money from Main Street (the real economy).

Regular banks use ledger entries to create money for lending, just as the U.S. government uses ledger entries to create money for spending. Contrary to the fractional reserve myth, banks don’t need to “lend out” depositors’ money, since money consists of ledger entries. (Currency notes can be traded and spent like money, but technically they are not money. Currency notes represent money, i.e. they represent ledger entries. True money exists in bank accounts, which are the ledgers.)

There are two ways money is created: by federal government spending, and by bank lending. Both ways involve simply changing ledger numbers. Some people falsely believe there is no government spending; only bank lending. That is, they think all dollars are lent into existence. I’ve covered that error many times, and I will do so again if asked.

There are two ways that money is destroyed, namely by federal taxation, and by paying off loans. Both ways involve simply changing ledger numbers. If a bank lends you $100,000, then the bank makes a 100,000 ledger entry in an account for you. Voila: the bank has created $100,000 in loan money. As you pay down the loan, the number in the ledger is repeatedly changed until it reaches zero. The $100,000 in loan money has been destroyed. The bank makes its profit on the interest that you paid along with the principal.

These simple facts are difficult for people to understand because people don’t want to understand. By denying these facts, people can say, Yes the U.S. government is bankrupt, and the wars did it! (Or Social Security did it. Or whatever did it.)

 

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9 thoughts on “Where does money come from?

  1. Great article; if only it were correct.
    1…(T)he U.S. government creates its spending money out of thin air, simply by making ledger entries. And the government likewise destroys money (i.e. sends it back into thin air) by making ledger entries. Therefore the U.S. government has no need for tax revenue.
    CORRECT: but fails to mention that now there is legislation that states the U.S. gov. MUST pay a tax (called interest) on its creation.
    2 …”The federal government is comparable to the board game Monopoly.
    Monopoly generally involves several players plus a “Bank,” which, like the U.S. federal government, is Monetarily Sovereign. That is, the monopoly Bank never needs to run short of dollars.”

    INCORRECT:your statement,MB is MS.

    “Monopoly ‘Bank’ is not Monetarily Sovereign, it is limited in its issuance to what it has already in existence.

    Have you read “The Role Of Money”?

    Them you will be able to know…What is money, then you will know that there is two different kinds of “money”;
    justaluckyfool@aol

    Like

    1. “Monopoly ‘Bank’ is not Monetarily Sovereign, it is limited in its issuance to what it has already in existence.”

      +++++++++++++++++++++++++++++++++++++++
      Thanks for visiting and commenting. There is no limit to the numbers that can be written in the Monopoly bank columns. There is no limit to the scraps of paper we can use for Monopoly currency notes. Hence there is no limit to Monopoly Money, and no limit to U.S. federal dollars. Monopoly dollars and U.S. government dollars are not physical. Hence they are infinite. That book you recommended confirms this. It describes how money is created and destroyed via ledger entries.

      Like

      1. Yes, ” There is no limit to the scraps of paper we can use for Monopoly currency notes.”…but that would be ‘counterfeiting’. (Monopoly money is per se copyrighted}. But…”It was recognized in Athens and Sparta ten centuries before the birth of Christ that one
        of the most vital prerogatives of the State was the sole right to issue money.”… The Monopoly Game does have this sole right…
        The amount that the MG has printed is ‘real money’ using any paper or printed digits by ANYONE ELSE creates ‘fictitious money’.

        Like

        1. The problem with poor people is that most of them are too “brilliant” to learn anything. That’s why they’re so easily enslaved. I have a neighbor aged 71. She lives alone in a house across the street from me. She gets Social Security benefits. She peruses the Internet from her smart-phone. She does not blog. She does not fancy herself an expert on anything. Two nights ago I had a chat with her about several topics. At one point I explained how federal dollars work. She understood instantly and effortlessly, the first time, since she was not too “brilliant” to listen.

          Like

  2. Please let me repeat:
    Justaluckyfool
    Apr 1, 2017
    Thank you, thank you both for taking the time and effort to… “***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC), Hindu Prince, founder of Buddhism.

    IMHO,Perhaps, maybe there is only ONE major issue of difference that may need to be resolved.
    RESOLVE- “What is ‘Money’, and What is the Role Of ‘Money’; all issues will then have perhaps a common
    causality.
    Quote Frederick Soddy, “(Entire book as a free download… http://archive.org/details/roleofmoney032861mbp

    PREFACE
    This book attempts to clear up the mystery of money in its social aspect. With the monetary
    system of the whole world in chaos, this mystery has never been so carefully fostered as it is to-day.
    And this is all the more curious inasmuch as there is not the slightest reason for this mystery.
    This book will show what money now is, what it does, and what it should do. From this will
    emerge the recognition of what has always been the true role of money. The standpoint from
    which most books on modern money are written has been reversed. In this book the subject is not
    treated from the point of view of the bankers as those are called who create by far the greater
    proportion of money but from that of the PUBLIC, who at present have to give up valuable
    goods and services to the bankers in return for the money that they have so cleverly created
    and create. This, surely, is what the public really wants to know about money.

    It was recognized in Athens and Sparta ten centuries before the birth of Christ that one
    of the most vital prerogatives of the State was the sole right to issue money. How curious that
    the unique quality of this prerogative is only now being re-discovered. The” money-power ” which
    has been able to overshadow ostensibly responsible government, is not the power of the merely ultrarich, but is nothing more nor less than a new technique designed to create and destroy money
    by adding and withdrawing figures in bank ledgers, without the slightest concern for the interests of
    the community or the real role that money ought to perform therein.
    The more profound students of money and, more recently, a very few historians have realized
    the enormous significance of this money power or technique, and its key position in shaping the
    course of world events through the ages. In this book the mode of approach and the philosophy
    of money is expounded in the light of a group of new doctrines, to which the name ergosophy is
    collectively given, which regard economics, sociology, and history with the eye of the engineer
    rather than with that of the humanist. It is concerned less with the details of particular schemes
    of monetary reform that have been advocated than with the general principles to which, in the
    author’s opinion, every monetary system must at long last conform, if it is to fulfil its proper role
    as the distributive mechanism of society. To allow it to become a source of revenue to private issuers is
    to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately
    to overthrow all other forms of government.”

    Quote, Frederick Soddy, “Genuine and Fictitious Loans. For a loan, if it is a genuine loan, does not make a deposit, because what the borrower gets the lender gives up, and there is no increase in the quantity of money, but only an alteration in the identity of the individual owners of it. But if the lender gives up nothing at all what the borrower receives is a new issue of money and the quantity is proportionately increased.
    “… There was essentially nothing new in this, or different in principle from lending ” promises-
    to-pay-gold ” instead of gold itself, save that the banks avoided the necessity of giving printed receipts for the goods and services their borrowers obtained for nothing, and there was a secret instead of open creation of money. Instead of lending
    notes, the banks, in effect, now lend cheque- books and the right to draw cheques up to limited sums beyond what the borrower possesses. For nearly a century, until the revelations of the War made it impossible to conceal the truth from the
    general public, the bankers stoutly denied that they were creating money at all, and claimed that they were merely lending the deposits their clients were not using…
    “… So elaborately has the real nature of this ridiculous proceeding been surrounded with confusion by some of the cleverest and most
    skilful advocates the world has ever known, that it still is something of a mystery to ordinary people, who hold their heads and confess they are ” unable to understand finance “. It is not intended that they should. But if, instead of trying to puzzle it out along the lines of ” what you get for money “, these people will reverse the procedure, as in this book, and do so on the
    of ” what you give up for it “, the trick is clear enough.
    ”Read more …..” THE ROLE OF MONEY , ” by Frederick Soddy (complete book: free book download: http://archive.org/details/roleofmoney032861mbp )

    Please, examine.
    Read more…https://bestsolutionsfl.wordpress.com/2016/12/21/where-we-went-wrong-ami-public-banking-and-soddy-solution/
    ReplyLike
    elizabethharris001
    Apr 1, 2017
    Justaluckyfool:

    Many thanks for your comment. I shall read that book (all 244 pages) and afterward do a blog post about it.

    Some items in your comment that I liked…

    [1] “There is not the slightest reason for this mystery.”

    The reason lies in average people’s deliberate obtuseness. You can see this obtuseness in a different reader’s comments above.

    [2] “It was recognized in Athens and Sparta that one of the most vital prerogatives of the State was the sole right to issue money. How curious that the unique quality of this prerogative is only now being re-discovered. The money-power which has been able to overshadow ostensibly responsible government, is not the power of the merely ultra-rich, but is a new technique designed to create and destroy money by adding and withdrawing figures in bank ledgers, without the slightest concern for the interests of the community or the real role that money ought to perform therein.”

    Correct. From this it follows that monetarily sovereign governments do not need to collect taxes (in their own currency) in order to create money (in their own currency). All they need to do is change figures in bank ledgers. Unfortunately some people are far too “brilliant” to grasp this simple fact, as you can see in someone else’s comments above.

    [3] “The more profound students of money and, more recently, a very few historians have realized the enormous significance of this money power or technique, and its key position in shaping the course of world events through the ages.”

    Correct. Money is so powerful that it behooves us to truly understand what money is, and how it works. Unfortunately some people are too “brilliant” to understand.

    [4] “In this book the mode of approach and the philosophy of money is expounded in the light of a group of new doctrines, to which the name ergosophy is collectively given, which regard economics, sociology, and history with the eye of the engineer rather than with that of the humanist.”

    I like it. Money is simply a way to manage (through accounting) natural resources, and especially human energy. Hence ergosophy.

    I also like the book’s differentiation between genuine and fictitious loans. Genuine loans are acts of kindness, compassion, and vision. Fictitious loans are theft and exploitation.
    ReplyLike
    Justaluckyfool
    Apr 1, 2017
    elizabethharris001 to Justaluckyfool:”Many thanks for your comment. I shall read that book (all 244 pages) and afterward do a blog post about it.”
    I pray, from your words to God,s ears … ” after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha

    “There never was an idea stated
    that woke men out of their stupid indifference
    but its originator was spoken of as a crank.”
    — Oliver Wendell Holmes, Sr.
    (1809-1894) American Poet

    ** ONE OF THE BEST OF THE BEST-
    “The Role Of Money”
    .*** why not read a Noble Laureate ?
    ******Excerpt from http://en.wikipedia.org/wiki/Frederick_Soddy

    “In four books written from 1921 to 1934, Soddy carried on a “quixotic campaign for a radical restructuring of global monetary relationships”[this quote needs a citation], offering a perspective on economics rooted in physics—the laws of thermodynamics, in particular—and was “roundly dismissed as a crank”[this quote needs a citation]. While most of his proposals – “to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort” – are now conventional practice, his critique of fractional-reserve banking still “remains outside the bounds of conventional wisdom”[this quote needs a citation]. Soddy wrote that financial debts grew exponentially at compound interest…”

    Free download-
    http://archive.org/stream/roleofmoney032861mbp/roleofmoney032861mbp_djvu.txt

    Like

  3. (off topic) dear elizabeth, your sagacious insights are sorely missed over at the Every(wo)man Blog.
    Creighton was rude & unjustified in his little tantrum. But he’s been very stressed.
    Please return with yer commentary.
    Big fan sfreer7@gmail.com

    Like

    1. Thanks for your comment, but he permanently banned me.

      To be honest I became bored with his vanity. So I pricked at him to make him squirm. I was willing to drop the issue, but he was not. So, out of boredom I kept making him squirm. Realizing that he was losing, he became so frustrated that he simply banned me.

      That’s okay. I had planned to vanish anyway.

      Like

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