Fiat Money is not convertible into hard assets (such as gold,as it was in the post WW2 "Bretton Woods" period)Government created physical Notes & Coins are now only about 5 per cent of the money in circulationThe other 95% of money is Debt Based Money money held electronicallywithin the banking system This money is lent into existence and created from nothing e.g. a $100,000 loan is created by two entries in a bank's computer system: When the loan is paid back the loan, the $100,000 of money is destroyed, but the bank gets to keep the interest as a profit. The bank has profited from something that it created out of thin air. This is why banking is nearly the most profitable business in the world (except for gambling and illegal drugs perhaps) as long as the loans get paid back. If money creation is the property of the state why would it give this power free to commercial banks to make so much money, and why would it lend from commercial banks?Nature of the Modern Monetary System$100,000 loan$100,000depositBank AssetBank LiabilityInterest

Fractional Reserve Commercial Banking- Money Created From Debt$10,000 car loanInterestLets say "A bank can only lend out 9 times (this ratio varies between countries and through time) what it has on deposit at the central bank "high powered money". e.g. new bank starts up with $1,111.11 in shareholder capital which is put on deposit at the central bank AND A bank can only lend out 9/10 of money it receives on deposit"The Banking system is a closed system, ie money lent out by onebank will tend to return as a deposit to another. We can represent this as there being just one bank. as per below:$1,111.11 capitalBank AssetsBank Liabilities$10,000 car loanNewMoneyPaid to Seller$10,000 depositDeposited By Seller$9,000 car loanInterest$9,000 car loanNewMoneyPaid to Seller$9,000 depositDeposited By Seller$8,100 car loanInterest$8,100 car loanNewMoneyPaid to Seller$8,1000 depositDeposited By SellerThis repeats until up to $100,000 of debt money created fromonly $1,111.11 of capital, and the bank gets to keep the intereston all the loans that are paid backHigh poweredmoney

The problem with a commercial banksdebt-based money Money creation is dependent upon lending, and as loans are paid off money is destroyed. If more loans are not taken out to offset those paid off the money supply will shrink - a "credit crunch". The interest charged requires a continual expansion of the economy to be able to pay off the interest, driving a need for unsustainable compound growth to match the compound interest (interest charged on interest). Some people make the mistake that more money needs to be created to pay the interest. Its not that simple as a given amount of money may change hands many times thus creating the extra output to pay the interest. This is why we talk about both the stock of money (the amount available) and the velocity of money (the number of times it changes hands in a given time period). The charging of interest by commercial banks creates a tax (or "rent" in economic terminology) upon the rest of the economy, increasing costs and transferring wealth from debtors (the less wealthy) to the creditors (the more wealthy). Compound interest and relatively unlimited debt creation increases the amount of debt and thus the size of the financial system vis a vis the rest of the economy. Finishes in a series of financial crises until excessive debt removed, as in the 1930's but not yet since 2007.

Banks go bust though if the money doesnot get paid back, right?Privatization of profit, socialization of losses,some recent examples:Banks tend to get bailed out through the public purse while bank executives, bank bond holders, and even bank shareholders do not share in the losses The US Treasury making full payment on contracts with bankrupt entities such as AIG with a $13 billion payment on credit derivatives to Goldman Sachs (would have got pennies on the dollar in bankruptcy court and gone bust themselves). Bank of Montreal (paid $1 billion) was one of many other US and international banks that benefitted from this. US Federal Reserve provides $trillions of short term liquidity to US and international banks as wholesale funding dried up, saving the banks from a liquidity crisis. US Federal Reserve directly purchased assets from commercial banks that were hard to sell in the free market US government entities (FHA) directly provided insurance for low/near no down-payment loans to keep the mortgage market functioning and thus facilitating bank profits UK government took major equity stakes in UK banks but at no time asked bank bond holders to take losses. Canadian government provided C$10's billions of liquidity to banks by purchasing mortgage loan portfolios, helping save them from a liquidity crisis.

Money Created By the State- Money Spent Into Existence Can be lent to the state by the central bank which is owned by the state. As the central bank is the property of the state, the money is actually being created debt free by the state. The Bank of Canada is authorized to do this, and did so from the 1930's to the mid 1970's when the practice was stopped. This debt free money allowed for the funding of war and much of the rapid Canadian growth in the post-war period. It could again be used to fund sustainable investments and retire interest bearing debt (the majority of the government deficit is compoundinterest on previous interest bearing debt). This is exactly what the Federal Reserve is doing by purchasing US government bonds. It is actually providing $billions of guaranteed profits to financial intermediaries by purchasing through them rather than directly from the US Treasury. Money could be issued by an entity independent which has specific rules around how much money should be issued Money could be issued by a local community