How Money Is Created & Personal Finance Implications

I feel that I need to write more about how money is created before I dig into more specific topics you are interested in such as trading. I think it is necessary to understand it and what impact it might have to your personal finance! This article might inspire you in a way that you’ll start thinking about money and the whole monetary system we live in a bit differently 🙂

Money, to a great extent, governs our lives. In most aspects of our lives money is somehow involved. Cost of food, housing, education, travel. Everything costs some money. How many times you wished to have just a bit more and all your life and future would be brighter and happier? But have you ever wondered or investigated how money is actually created? In other words, how money comes into existence and where and from whom it comes from? In this article we aim to shed some light on money from a bit different perspective than you are used to and how it affects our personal finances.

Personal finance, money

personal finance

Most of us think of money as a banknote in our pocket or a bank account in our bank. We tend to say that we have our money in the bank. But, big surprise, there is no money in your bank. You are only a creditor of the bank which means that you have a claim on bank’s assets but not on any banknotes. In fact, if all the creditors (yourself and other people in this case) claimed their deposits (money) at the same time every bank would quickly run into troubles as its assets consist mostly of illiquid loans, i.e. loans or promises to pay in the future provided to people and companies. In other words, money is virtual!

Now, how is this possible that there is no money in your bank? The explanation is simple and straightforward. Modern day money is created as debt when banks grant loans/mortgages, also called credits. Out of nothing, out of thin air, no previous deposit is necessary. It is a matter of accounting but as a matter of fact modern banks simply create money in their accounting books by typing loan amounts in your bank account. People and companies, on the other hand, oblige themselves to repay the full loan/mortgage amount and pledge their real possessions as security for repayment, e.g. houses, land and other assets. Therefore, if you have a property or land on mortgage, it is not really yours until you repay to the bank. The bank has all the control!

As if it is not superb enough for the banks, which are mostly private corporations, that they possess the right to create money, there is something even more exciting for them. Banks can and do charge interest on all loans they grant, in other words, there is interest payable on all money created in the banking system. Now, you may wonder where the money to pay off the interest comes from. The interest can be paid only in money, of course! But this money can again only be created by way of credit and more loans. In this way, modern money is not backed by anything else but loans which are promise by people and companies to pay in future PLUS interest and the whole economic system consists of nothing else than gigantic pyramidal structure of debt!

As an example, if you take $1,000,000 mortgage loan on your house, the banking system creates $1,000,000 of new money which further inflates the house prices. Higher house prices means that less people will be able to afford to buy a house or have to get a higher mortgage which further inflates the house prices. Over the life of the loan you pay not only $1,000,000 you borrowed but also additional $1,000,000-$3,000,000 of interest, depending on the interest rate applicable. You also pledge your house as security to the bank. So whatever happens to you, illness, loosing you job, divorce,; the bank would kick you out of ‘your’ house. You also pledge, in a way, you entire life because you have to work very hard to repay the loan of $1,000,000 plus the interest of $1,000,000-$3,000,000 = $2,000,000 – 4,000,000!

Personal finance, money


Once you understand these simple principles of modern day banking, economics and finance will no longer be a mysterious creed for you. Have you ever asked yourself why economists and politicians always worship the idea of economic growth as solution for all economic problems? Are we not, as society, rich enough? Can we have no economic growth and only redistributed the wealth we have created? No we cannot, not in the current monetary system since it requires a never ending money creation with more and more debt for its very survival.

Also, have you ever noticed that despite the economic development all around the globe, people, companies and governments live under ever greater burden of debt? If you understand that money is created as debt in banks, than the mystery is solved. The more money in circulation, the more debt on the shoulders of governments (and the tax payers), people and companies. Last but not least, have you ever wondered why prices of everything you need for living are ever increasing, i.e. in economic terms inflation occurs? The simple explanation is ever increasing pile of debt/money created. We will leave to your consideration the ecological sustainability and effects on people’s lives of the current system.

Just to make it clear. We have nothing against money as such. It is and it has always been very useful human institution that enables exchange of trade and services. It is the way that money is introduced into circulation nowadays that supports the destruction of the planet and peoples’ lives. So, is there an alternative? Of course, there is and many people work hard to present more balanced, sustainable and human friendly economic system to the public. Money can be issued in many other ways that would benefit people and the society. Unfortunately, enormous vested interests exist as well as unwillingness to really understand the issue, let alone to change the system. But we will not investigate it in this article any further. Rather, what does it all mean to us, as individuals and families? What are the implications for us?

I was  faced with living an usual family life of working long hours for a company, that has to repay its debt with interest and provide some return to its owners, in order to be able to repay a mortgage on a house that we would fully repay sometime before our retirement, and at the same time not seeing each other as partners and not seeing our kids much and giving them over to some educational institutions. We were not ready to accept it. So we decided to become life-long tenants, use our savings as a buffer against any misfortune and search for solution how to sustain ourselves in a way that would not interfere in our life as a family.

We found an online share trading as an  ideal solution for us and we will cover it in more detail in our next article.

Thanks for reading and feel free to post comments and questions.


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