Since 1972, the US Dollar has been a purely fiat currency with a free-floating exchange rate. However, Congress never changed the laws for issuing currency and Treasury Bonds are still, to this day, necessary if the U.S. Treasury wants to spend or create money it doesn't have.
In other words, as the laws are currently written, the only money that the United States Treasury can freely issue are coins. But, other than coins, the U.S. Treasury may not create or spend any new money that isn't offset by the issuance of Treasury Bonds.
The Fed, on the other hand, can print money out of thin air, but each dollar it prints is entered as a liability on its balance sheet — and every liability is offset by higher reserve holding requirements with excess bank reserves at the Fed.
Therefore, every dollar issued by the government — other than coins — must originate from either a Treasury Debt or a sterilized Federal Reserve liability. Since coins make up a tiny amount of our monetary base, it stands to reason that the overwhelming majority of our monetary base wouldn't exist without corresponding Federal debt.
But as we all know, the majority of our money supply doesn't come from the government. Most of the money supply comes from banks that create loans — what we call the fractional reserve banking system.
Unless anyone can think of another way that money is created, it would seem that 99% of our money supply would simply not exist without public and private debt.
Now, here's the problem.
With every loan issued by a bank, the banks require the loan plus interest to be paid back. So... How do we pay the interest on all of this debt-based money if the money to pay the loans doesn't exist?
Without more dollars being issued (from either more public or private debt) it would be impossible to pay back the interest on every loan. So, in order to pay off interest on all future loans, more public or private debt is needed.
I've been thinking about this for awhile and can't find an answer.
Mind you, I didn't make this up. This is actually the #1 argument against the Fractional Reserve Banking system:
This leads me to believe that interest is really a scam designed to generate profits for private banks with money that doesn't actually exist in the money supply yet — causing a never-ending public and private debt cycle to emerge.Critics of fractional reserve banking claim that since money creation requires loans from the banking system, people are required to go into debt in order for any new money to be created. They assert that this can debase the means of exchange. While there is no controversy over the fact that the commercial banking system expands the money supply, critics find it problematic that banks "create money out of nothing."
One criticism posits that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid in a debt-based monetary system unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. This implies that debt must grow exponentially in order for the monetary system to remain solvent. This was the argument of the Social Credit movement of the 1930s, who proposed to remove the job of money creation from banks and give it to governments.
Source: http://en.wikipedia.org/wiki/Criticism_ ... criticisms
And, if banks won't lend money, then it would seem to be mathematically impossible for people not to default without more debt-based money being issued. This seems like a simple balance-sheet issue. But, maybe others can point out something that I'm missing.
Would love to hear your thoughts. Thanks.