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Pulakit Bararia
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We think of banks as places that store our money and keep it safe. But that’s not really what’s going on. When a bank gives out a loan, they don’t get poorer. They simply type new money into your bank account. It’s brand-new money that never existed before. The only difference is that when you pay it back, the money gets canceled out— and the bank only keeps the interest. The problem? Productivity doesn’t necessarily increase when we create new money, and that can cause inflation. If society starts producing fewer goods, but more money is added into the system, prices will go up. Since there’s no additional contribution to match the extra money, banks have almost complete freedom to create as much as they like. And if they’re running low on backup money? They can simply go to the central bank and ask for more. And that’s when things get ridiculous. Banks and foreign countries buy bonds from the U.S. government, and this influx of money helps fund the government’s budget. But here’s the catch— The U.S. government almost always spends more than it makes, so it’s constantly in debt to those who buy these bonds. To pay off that debt, it uses taxpayer money. Last year, the government spent almost $7 trillion— but tax revenue wasn’t enough to cover it. So what did they do? They had to create new bonds to get more money. As crazy as it sounds, this system of adding more money through debt is how the world operates.
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