Foundations on the topic: Debt

What is the connection between debt and the money system? Why does debt keep on growing?

The money system causes constantly growing debt

Electricity comes to us from the plug, drinking water from the tap and money from the bank. But most people do not know how money is created. Who makes money? Or, as the experts ask: how is money created?

Cash in Germany is issued by the German Central Bank (Deutsche Bundesbank) and the European Central Bank. A maximum of 10% of money in existence in Germany is cash. Germans love to pay in cash. Other countries use cash much less and the long-term trend is away from cash. Most money only exists digitally as deposits in bank accounts and is created by commercial banks when bank loans are created. This system of money creation is the same all over the world: money is created through credit. Thus money and debt are two sides of the same coin. For each Euro of debt someone else in the world has a Euro of wealth.

What does money creation through credit mean? When a bank gives a 100,000 Euro loan, for example to buy a house, then in principle it creates this money ‘out of nothing’. The bank must keep a minimum reserve of 8% (1) to cover this loan and will demand some kind of collateral, for example in the form of a mortgage; thus credit creation is not unlimited. The bank can, with or without our savings accounts, give credit and thus create money. Banks are actually not only – as is often claimed – intermediaries for money.

read more