# Evolving Money/The Story of Debt

(Transcript of the video)
This is the story of debt.
It's the story of how when we create money, we also create permanent debt.
Economist John Kenneth Galbraith said the process by which banks create money is so simple that the mind is repelled.
This is because developed countries create money as interest-bearing debt.
What does that really mean?
Let's begin by looking at Treasury securities.
Treasury securities are government debt that is issued by the US Treasury. They are available in four different forms:
* Treasury bills
* Treasury notes
* Treasury bonds
* Treasury inflation-protected securities
Each of these is purchased at some discount and redeemed at the full face value.
While that may sound a bit obscure, you can think of each of these as having a principal, which is the amount of money loaned, plus interest, which is essentially a time-sensitive fee paid for providing the loan.
How is money created within the United States?
The United States Treasury issues securities, one of the four types we just discussed.
These securities are sold at auction and are often purchased by major banks.
When the banks purchase the securities, they pay the Treasury for those securities.
So far, no money has been created.
This is just the exchange of money already in existence and held by the bank paid to the Treasury for a promise to repay the loan with interest by the Treasury at some later time.
The Federal Reserve, however, has a special status established by the Federal Reserve Act of 1913.
Because it is the central bank of the United States, it is allowed to create money to purchase securities.
Therefore, the Fed purchases Treasury securities from banks in return for the Treasury securities they receive from those banks.
An important difference, however, is that the Fed had no money in its account.
Its bank account was zero when it credited the selling bank's account in return for receiving the Treasury securities.
A publication called “Putting it simply,” published by the Boston Federal Reserve, describes it this way: When you or I write a check, there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check, there is no bank deposit on which that check is drawn.
When the Federal Reserve writes a check, it is creating money.
How does this create permanent debt?
Treasury securities always include a principal plus interest; therefore, the purchase of a Treasury
security is a promise to repay the principal and the interest. The amount of money created when the Fed purchases the Treasury security is equal to the principal of the security, but the debt owed is equal to the principal plus interest. The money needed to pay the interest is never created.
Therefore, permanent debt equal to the interest always remains.
If you create more money, perhaps to pay off the interest owed, you always create even more debt because the debt created always exceeds the amount of money created.
Let's look at an everyday example:
Suppose you want to buy a car and decide to take out a car loan.
You decide to borrow a thousand dollars at five percent annual interest.
You approach your local bank, complete a loan application, and the bank accepts the loan.
In return for accepting the completed loan application, the bank credits your account for a thousand dollars. This is how you get the money you're borrowing.
In exchange, the bank gets your promise to repay the thousand-dollar principal, along with interest accumulating at the rate of five percent or fifty dollars per year.
If the bank has sufficient capital to meet its reserve requirements, the transaction is complete at this point; otherwise, the bank must obtain additional money to increase its own account balance.
The bank does this by selling securities to the Federal Reserve.
In return, the Federal Reserve creates money by crediting the bank's account.
Unfortunately, the money required to repay the interest on these loans has never been created.
You may have a good job and earn a good salary and have no trouble repaying the debt you have incurred. However, all the money you earned was created in the same way, ultimately by the Federal Reserve creating more debt than the money it provides.
There really is no good way out of this.
There are various ways to eliminate debt, but they are disruptive.
For example, bankruptcy is court-authorized permission not to repay the debt you have incurred.
The most common approach is to continue to grow the economy.
This, however, only obscures the permanent debt problem as it makes the problem bigger.
It is important for each of us to understand this problem and then to ask our elected politicians if they understand this.
The problem is systemic.
It's caused by the way we create money.
This problem exists regardless of the size of government, the tax structure, or the spending levels.
Permanent debt is created whenever we create money as interest-bearing debt.
Ask your politicians how they foresee this ending.
Have them explain it to you in detail.
Check their math to ensure their proposed solution will work for all people and institutions, including
creditors, debtors, banks, and governments here and abroad.
How exactly will the money be created to pay the ever-increasing debt?