Simple Liberty  



Monetary Reform

Chapter 6

Monetizing Debt

Written by Darrell Anderson.

It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people.

Attributed to Thomas Edison

By identifying currency as a promise to pay, Thomas Edison arguably seemed to understand that currency — regardless of form or substance — is a token symbol of an unfinished exchange of wealth. Edison seemed to understand that the process of introducing new currency through third parties was inefficient and harmful.

The word monetization has become popular the past many decades. Many individuals understand the basic currency-creation process of central banking and realize currency is introduced into circulation by buying fictitious debt backed not by wealth but only the illusion of future taxpayer production. The debt central bankers buy is not created through an actual exchange or creation of wealth, but merely by printing debt IOUs. The debt a central bank buys is sleight-of-hand, not true debt as witnessed in an unfinished exchange of wealth.

Many individuals also realize that monetization occurs at the local level when people borrow from bankers. Some individuals are even aware that bankers possess a politically privileged permit to create new currency for loans. This entire process often is called a debt-based currency system.[1]

The process of monetization might be defined as creating and introducing currency into circulation through debt. Although such a definition is sensible and descriptive of modern monetary exchange systems, a broader definition is possible:

Monetization: a process of creating debt to immediately receive wealth.

With that broader definition, and understanding the definitions of wealth and debt, and the purpose of currency, reveals that all wealth exchange systems are debt-based systems. A debt is created the moment there is an unfinished exchange of wealth. Even if people were to choose a pure wealth-for-wealth trading system using no general circulating currency, any unfinished exchange of wealth creates a debt and by definition is a debt-based exchange system. There is little escape from this system or process. The only way to avoid a debt-based exchange system is requiring immediate exchanges of wealth. Such a goal is impossible, however, because there are natural limits to creating wealth. For example, crops require several months before harvesting is possible, thereby preventing immediate exchange based upon that wealth. Thus, all human exchange systems, by definition, are debt-based.

Because so many people confuse currency and wealth, one of the widely circulated monetary legends is that all exchanges are immediate or instantaneous. An easy example to understand this misconception is a telephone bill. The user receives services and also enjoys a time-delayed payment for those services or pays a monthly service charge in advance and a time-delayed charge for additional services.

Private IOUs and general circulating currencies merely serve as token symbols of unfinished exchanges of wealth. The form or substance of the IOU or currency does not change the definitions or the process of introducing time delays in exchanges. The IOU or currency serves only as a token reminder of that unfinished exchange.

Another often repeated monetary illusion is that a fixed amount of currency limits the number of possible transactions. That is true only if the currency fails to circulate. By design, currencies are intended to circulate. Currencies exist for one reason only — to facilitate exchanges, which in turn improves aggregate efficiency in trade.[2] Thus, if there is no need for trade, or if trade occurs directly (barter), then there is no need for a circulating currency.

The rate at which the total supply of currency in circulation should change is easy to understand. If currency is a symbolic token representing an unfinished exchange of wealth, then new currency should be introduced into circulation only when there is a corresponding unfinished exchange of wealth. This is the only principle necessary to gauge the amount of currency needed to operate with economic efficiency.

Because nobody can predict with certainty when people will want to trade, and when they will want to trade through a medium of exchange, there is no way to predict the total amount of currency that should be in circulation. That does not mean, however, that there is no way to introduce currency into circulation. The guiding principle is whether there is an exchange of wealth. Eliminate the fallacy that all exchanges occur instantaneously, eliminate the fallacy that a fixed amount of currency limits the number of possible transactions, and introduce the necessary element of credit to facilitate exchanges through the time domain, then introducing an appropriate amount of currency becomes possible.

Ignore for the moment the illusion of how politicians create currency through central banking and focus only on the local level.

As a community of people grows, population increases, the division of labor increases, production of new wealth increases, and the need for currency increases. The idea that currency serves only to help people exchange wealth means people need only a certain amount of currency to maintain commerce and trade.

Through political privilege bankers create new currency for circulation. However, bankers do not create currency any time they fancy, otherwise they would just create a few million dollars for themselves and retire to the beach. Everybody would learn how to become a banker. Instead, bankers introduce currency into general circulation through individual borrowers.

At first glance many individuals believe bankers create currency backed by nothing — the common accusation of creating new currency out of thin air.[3] By definition, all currency is backed by wealth. Because currency is normally introduced into circulation through an unfinished exchange of wealth, all currencies are fundamentally backed by wealth. When bankers create new currency, no wealth exists to back that currency. Or is there?

Bankers serve an important function in the overall exchange system by providing bookkeeping services for clients. Through this service, bankers are continually shuffling accounts payable and receivable from one client’s ledger to another. This service dramatically reduces the amount of physical currency required to circulate and increases aggregate efficiency.[4] Through these straightforward ledger adjustments people exchange wealth for wealth without actually exchanging currency.

Therefore, wealth does indeed back the currency created through a banker at the local level, or at least soon will. This difference between the amount of currency in circulation and the increased production of wealth is known as virtual wealth.[5] However, unlike actual wealth residing in the physical world, virtual wealth is imaginary. Actual wealth is produced in the past, virtual wealth represents wealth produced in the future. Virtual wealth is a negative quantity, something that does not yet exist; but more importantly, is a reference to wealth, not currency. Currency is merely a token symbol of that virtual wealth.

Imagine the farmer who harvests crops in excess of personal ability to consume. That excess wealth represents exchange power — wealth that could be exchanged for other forms of wealth. That excess of crops represents virtual wealth — other forms of wealth not yet owned. The farmer could exchange that excess crop directly for other forms of wealth or could forego immediate consumption of wealth by accepting and holding currency. Thus, just like the excess crop, excess currency represents virtual wealth.

When bankers create new currency to loan to individual borrowers, that excess currency represents virtual wealth — wealth that does not exist but soon will. Therefore, there is a direct connection between the newly created currency and wealth — despite the “thin air” claims of many people. The difference between the banker-borrower and the farmer is that the farmer produced wealth before receiving the currency and the banker helps the borrower create wealth after introducing the currency. The direct connection between currency and wealth is always present. The only change is the perspective from the time domain.

Initially the “thin air” claim makes sense, but only in reference to where bankers receive their political privilege. The currency bankers produce is nonetheless backed by wealth — wealth not yet produced but soon will be produced. The same cannot be said of the bribe borrowers must pay to the banker to create the currency — compounded interest payments.

Some modern monetarists believe that politicians should increase the currency supply at fixed rates.[6] Generally, the present monetary system already attempts to create currency in such a manner. Unfortunately, the mechanisms used are flawed and worse, politicians rarely restrain themselves to such a noble goal. If politicians could be limited to increasing the currency supply only through local bank loans, the entire topic of currency inflation through the mechanism of central banking would be relegated largely to classroom discussions. Of course, currency inflation still would exist because of the mechanism of compound interest. However, through the mechanism of central banking politicians like to create additional currency to serve their own nefarious ends and desires. Whereas at the local level actual wealth is being exchanged for actual wealth, at the politicians’ level they get something for nothing.

When politicians monetize debt, usually there is currency inflation because additional new wealth seldom backs that new currency. The reason is straightforward: politicians are consumers and redistributors of wealth, not direct producers of wealth. Participants in the political system are redistributors because politicians can give nothing except what they have first taken.[7]

Occasionally such newly created currency is backed by goods and services, for example, when introducing currency into circulation for infrastructure projects. And sometimes not, as when buying war materials. Notice the quick destruction of such wealth, and human lives that produce future wealth, as well as the destruction of existing wealth that must be replaced. Thus, such easily created currency usually is backed by no wealth and might be used to destroy existing wealth. Worse, such destruction dramatically impedes the ability to produce future wealth because of the loss of existing capital and human lives. That is one reason why wars often are followed by an inflationary cycle — the currency is still in circulation but the original wealth that backed that currency and human lives no longer exists. Consider the wealth destruction and inflationary effects of only one 1 million dollar missile.

There also is no actual exchange of wealth when politicians create new currency only to pay political promises and bribes such as all the various welfare schemes. Perhaps if actual production was a part of this coerced political charity game some of the sting might be alleviated, but that would not eliminate the fact that the politicians themselves are producing no wealth backed by this currency creation.

Although some individuals have analyzed a general need to create additional currency as production and population increase, they complicate that idea by placing their faith in the philosophy of statism to regulate that increase. Furthermore, some people define currency creation as occurring only within the context of the past. That is, they would have the politicians create new currency only after excess production occurs. Proponents of hard money systems follow that same line of reasoning; production first, then currency creation. A challenge with such systems is determining when excess wealth has been created and more importantly, subsequently exchanged. The flaw is that production does not dictate the need for additional currency, only exchange determines that need. People who self-capitalize have no need for a circulating currency. Only when people trade with one another does that need arise.

Consider the current process of introducing currency into circulation just immediately before producing new wealth. There exists objective criteria for determining when wealth is created and exchanged to represent and back that currency. Additionally, creating the currency just before producing wealth provides the unique opportunity to create and exchange the wealth and encourage material progress. This is nothing more than the concept of extending credit. Thus, the definition of virtual wealth can be improved to:[8]

Virtual wealth: potential wealth to be created through future production and assumed to currently exist for accounting purposes; wealth that could be created provided all requirements for its production existed.

Some people will observe that modern banking provides the means to create new currency to back new wealth that soon will exist. Where many individuals get confused is not realizing that when bankers create new currency — backed by virtual wealth — the value of that virtual wealth is derived not from the bank loan or banker but from the local community of people that provides the labor and resources to create the new wealth.[9] Currency, when created in such a manner, is backed not by other forms of currency (such as gold or silver coin) but by the very wealth the new currency creates.[10] Notice that bankers are not the ones extending credit. That is an illusion. Bankers serve only in the role of coordinating wealth exchanges among the community. They are brokers only. The other people in the community are the ones actually extending credit.

Some individuals argue that monetization is inflationary. True, any modern bank loan produces currency that did not exist a moment ago, and by definition is inflationary because the quantity of currency increased without an immediate corresponding production and exchange of wealth.

However, within the aggregate there also is another individual repaying a similar loan and the two actions offset.[11] Currency inflation must be studied in the aggregate, not individually. Modern monetary systems are tremendously huge and attempting to study such large dynamic systems using individual static examples usually introduces fallacies of composition. Currency inflation is an average measure of a monetary system with respect to a base standard. The base standard is always the actual exchange of wealth. When currency is introduced at the local level through bank loans, there always is an exchange of wealth.

However, therein lies the rub. If, within the aggregate currency inflation is zero, that does not mean no pockets of fluctuation exist. If one area experiences inflation then another area must be experiencing deflation in order for the aggregate numbers to produce zero.[12] This is an inherent defect in all general circulating currencies.

Some individuals might argue that monetization at the local level is nonetheless inflationary and should be prohibited. However, consider the idea from the perspective of a direct wealth-for-wealth exchange system.

Suppose you want to build a new house. From where will you derive the necessary resources, labor, and skills? Only a handful of individuals, will possess the necessary resources, labor, and skills to build a new house. Most people will need to depend upon other people. They can borrow from other people or they can contract with those people to have them accept their own private IOUs. What do those IOUs represent? Those IOUs represent future wealth, wealth that they must create or produce by converting future labor energy into work. Those IOUs represent a debt owed. The people who help build that house are extending credit to the home builder. The IOUs are a mere formality representing those unfinished exchanges.

Consider that the holders can circulate those IOUs throughout the community. Other new house builders do likewise. The community of people is using those IOUs in the same manner as a general circulating currency. Thus, introducing those IOUs into circulation is little different than introducing new currency. The house is built and once the house is finished, the newly introduced currency represents unfinished exchanges of wealth and continues to circulate.

Those IOUs eventually circulate back to the original issuer — the home builder, who then must provide the wealth promised by the IOU. When providing the promised wealth the issuer receives the IOU and extinguishes or destroys the IOU. The wealth for wealth exchange process is consummated.

Modern bankers perform the same function within the current monetary system but unfortunately provide this important service for unnatural excessive returns. Notice with the IOU system that there is no siphoning of the base wealth-for-wealth exchange process.

People get confused about the monetization process because of the unnatural process of charging compound interest. The compound interest is distorting the currency creation and exchange process. Under such a system, any failure to pay a debt creates more debt without a corresponding additional production of wealth. By definition, debt is any unfinished exchange of wealth. With compound interest, a debt can increase forever but no human will live long enough to extinguish the debt through future labor. The next thing that happens is the holder of that debt wants to transfer that debt to children and to their children after them. Sound familiar?

Large-scale ventures such as building a house, factory, or any other new business are difficult because most people require the help of others. Even in a direct wealth-for-wealth exchange system, people will incur debts to those people who help build the venture. Few individuals can financially build a new house without incurring a debt to others. Using currency merely makes the process easier for everybody.

The true problems of monetization through a nationalized currency are:

  • Politicians controlling credit by intervening in the currency creation process — something that should happen voluntarily only between consenting individuals.
  • Bankers by political privilege and monopoly charging unnatural exorbitant fees of compound interest for providing what is arguably a community administrative service that should benefit all people.

This process creates artificial scarcity. By creating artificial scarcity in a medium of exchange, the associated exchange power also is manipulated. Value is partially a function of scarcity. Politically manipulating a currency is no different.[13]

When politicians control the circulating currencies, there is only one cure for currency inflation and that is to prevent politicians from creating new currency backed by no new wealth. Politicians must be limited to collecting revenues only through the existing circulating currencies. Currency creation must occur only at the local community level, by direct exchanges between individuals, where such monetization of debt is backed by wealth. Currency never should be introduced into circulation without a legitimate exchange of wealth.

That bankers create new currency is merely a political privilege and monopoly; and compound interest is an effort to create virtual perpetual motion by capturing the labor of other people. Shrewd individuals might ask why bankers should be granted a privileged monopoly to create this new currency.

There is no good answer. The concept of virtual wealth is a natural phenomenon. Humans live with the constraints of the time domain and exchanging wealth rarely occurs instantaneously. Almost always there is a time lag and by definition, a debt appears in any unfinished exchange of wealth. Even in a pure wealth-for-wealth exchange system, people will be monetizing — the process of creating debt to immediately receive wealth.

Understanding the definitions of wealth, debt, and the purpose of currency reveals something that the politicians and moneyed elite do not want the general populace to understand: there is no reason why individuals cannot or should not monetize their own debt without the help of third parties such as bankers.

Eliminate the political control and the artificial scarcity stops.

In any direct wealth-for-wealth trading system, because wealth often is rarely exchanged immediately for wealth, a creditor-debtor relationship exists until the creditor finally receives wealth. In such a trading system the debtor has monetized that debt; that is, the debtor was willing to create debt to immediately receive wealth and the creditor was willing to forego an immediate exchange of wealth.

With that understanding people should be able to ask an obvious question: Why are bankers necessary to create loans and introduce currency into circulation?

The answer should be obvious as well. People do not need bankers to create currency, but bankers enjoy a political privilege to do so. True exchanges of wealth never introduce compound interest into those exchanges, only the politicization of exchange creates that opportunity and distortion. Through that privilege and through compound interest bankers attempt to create virtual perpetual motion by capturing the labor of other people. Only through this political monopoly of controlling credit can wealth be misrepresented by currency and wages artificially suppressed.[14]

Introducing a third party into the wealth exchange process — and through the facade of legal tender laws and political permits — only means the third party receives a coerced piece of the action. If only straightforward administrative fees were collected, the modern process of introducing currency into circulation to help coordinate exchanges in a global market would be acceptable. When compound interest is introduced into the process, the entire population is then enslaved because debt is created out of debt rather than from an exchange of wealth. The cost of that compound interest is passed to everybody in the form of dramatically higher prices, including the price of labor.

Eliminate the privileged political permits to monetize debt through a common currency system, and the bondage of compound interest and monetary systems is broken. Mutual survival is greatly promoted and every individual is more able to pursue happiness. Instead of 30 years, personally monetizing debt to build a new home would cost perhaps 7 years of future production — probably less.

The problem is not that humans use a debt-based exchange system, but that they use a compound interest exchange system that is politically controlled to benefit a privileged few. There is no reason why individuals cannot monetize their own debts and eliminate the slavery of a compound interest-based monetization system. Personal direct monetization also would help eliminate currency inflation because personal IOUs are introduced into circulation only with a direct unfinished exchange of wealth.

However, people are not going to forsake using a general circulating currency — at least not overnight. Thus, bankers need not disappear from the face of the earth. Many individuals still would want to use a banker to help safely store or transfer funds, as well as use convenient services such as checking accounts. Nobody can deny that bankers provide an important brokerage and bookkeeping service to help coordinate exchanges. Bankers possess standing to charge service fees and commissions for such services but have no standing to mask those fees through the malevolence of compound interest.

Bankers already possess the means to retool their services and serve in a community role of a clearinghouse. Acting in a clearinghouse role helps facilitate exchanges of wealth in a large global market. Bankers could charge administrative fees for converting personally monetized IOUs into a common circulating currency. To cover overhead costs, linear administrative fees should be charged for various services rendered.

Borrowers still would be subject to various fees and the basic concept that currency can command a leasing fee. However, those fees would be linear, corresponding to the linear process of producing and exchanging wealth.

Bankers could extend their existing bookkeeping services into a global brokerage service. For those individuals who do not want to use a general circulating currency, bankers could charge linear commission fees while serving as brokers to coordinate direct exchanges of wealth for wealth in a global market. The idea is already used in various commodity markets such as granary storage.

In a global exchange system such a system would require a brokerage system to facilitate exchanges, and such brokers would command a fee for their services. However, brokerage fees are not the monsters of compound interest. True, people still have to produce sufficiently to cover the cost of these brokerage fees in addition to the original exchange contract, but when people monetize their own debts there is no need for the enslaving effects of compound interest. Furthermore, a true wealth-for-wealth exchange system eliminates currency inflation and deflation.

The modern electronic banking system is already capable of converting to such a system. All that is needed is for bankers to stop charging and paying compound interest, and to add wealth-for-wealth brokerage services to their computer systems. In a direct trading and exchange system, and without the insult of compound interest, participants always experience zero inflation and always maintain expected future exchange power.

Consider some of the benefits of eliminating a common circulating currency and using a true wealth-for-wealth exchange system:

  • Eliminates the need for or to define a common circulating medium of exchange.
  • Eliminates currency inflation, which erodes future exchange power and increases uncertainty and fear.
  • Eliminates currency deflation, which occurs when a majority of people possess increased uncertainty and fear about the future and stockpile currency.
  • Eliminates boom and bust cycles, which are caused by trying to guess the appropriate total amount of currency to circulate.
  • Eliminates fears of counterfeiting, which erodes future exchange power.
  • Prevents politicians from borrowing “out of thin air.”
  • Inhibits politicians from manipulating the exchange system.
  • Eliminates the illusion from which compound interest is justified.
  • Eliminates numerous social problems caused by compound interest and inflation.
  • Eliminates the potential of being deceived by various components of a monetary exchange system.
  • Reduces the necessity of unnatural and massive overproducing, which dramatically reduces demands upon natural resources, which creates a more sustainable exchange system.
  • Curtails the ability to overproduce weapons of mass destruction, thereby dramatically reducing fears of wide scale attacks, and providing previously unknown peace and stability throughout the world.

Yes, bankers finally would have to work for a living just like everybody else, but everybody benefits instead of only the moneyed elite. The evil of compound interest and privileged monetization both end.

Special political privileges to monetize debt are another way people try to create a virtual perpetual motion machine and justify “might makes right.”


Terms of Use

Next: Chapter 7 — Alternate Infrastructure

Table of Contents



[1] Thoren and Warner, The Truth in Money Book, p. 248.

[2] Walker, Money, pp. 48–49.

[3] Thoren and Warner, The Truth in Money Book, p. 15.

[4] Walker, Money, p. 70.

[5] Soddy, Wealth, Virtual Wealth and Debt, pp. 137–138.

[6] Friedman and Friedman, Free to Choose, p. 308.

[7] Bastiat, Selected Essays on Political Economy, “Property and Plunder,” p. 183.

[8] My thanks to Dr. Harvey Barnard for this definition.

[9] Soddy, Wealth, Virtual Wealth and Debt, p. 81.

[10] Soddy, Wealth, Virtual Wealth and Debt, p. 80.

[11] Greider, Secrets of the Temple, p. 196.

[12] Greider, Secrets of the Temple, pp. 673–674.

[13] Gonczy, Modern Money Mechanics, p. 3.

[14] Martin, Men Against The State, p. 256, citing Hugo Bilgram, The Iron Law of Wages.