Understanding How the Monetary System Works

Before we get started, I want you to do something for me. Reach into your wallet and pull out one of your greenbacks if you have one.    

Take a look at the very top.   

What does it say?   

That’s right, “Federal Reserve NOTE”   If you live on the east coast of the US, you know that “note” is interchangeable with “loan” or “debt.” This means that every dollar that is ever created, can only be created from debt.   

Confused? Good. It get’s worse!   

In order for this currency to be created, the US Treasury must issue Treasury Notes (or Bonds) to the Federal Reserve. The Federal Reserve buys these notes and demand interest paid for the money loaned.    You might be thinking, “well how can you pay the interest if you have to have more money to pay it? There is only so much money in existence.” And you’re exactly right. It is set up this way on purpose. The debt will increase forever and it is impossible to be paid back because there will never be enough money in existence to pay it back.   

I know. You’re right. This system is f***ed. Why would anyone ever create such a system? Ah. You see, you’ve overlooked two very important details about the Federal Reserve...

1. It’s not Federal.   
2. There are no Reserves.   

I know this sounds crazy, but yes. The Federal Reserve is actually a private bank owned by the most wealthy men on the planet and the money they create is backed by absolutely nothing.   The end goal is to enslave as many people as possible to debt. This is facilitated by local banks. These local banks use a tool called fractional reserve lending. Fractional Reserve Lending is when they only keep 10% reserves and loan the rest. That’s right. That $100,000 that’s sitting in the bank, well, funny story. There’s actually only $10,000 there. Banks are allowed to do this so that they can loan as much money as possible to increase their revenue.   So, when you and everybody else comes rushing to the bank for your cash when times are tough…     

So what is the end result of this constant money and debt creation?   Lot’s of people in debt, with a very devalued currency.  

 The only way that this system can work is with fiat money. Fiat money is valueless currency that has no limit to how much can be created. Every country used to run their monetary systems using a gold standard. In 1971, President Nixon took us off of the US Gold standard "temporarily." Every other country followed suit and haven't looked back.

The result of leaving the gold standard is many countries with hefty deficits. These countries, namely the United States, have been using deficit spending to fund their government activities. Deficit spending is achieved by printing the money you don't have in order to pay for things. It's kind of like having a credit card with no limit that you force your tax slaves to pay the interest on. But remember kids, this money isn't getting paid back. I'll let you infer on the possible real world consequences of such monetary policies.

Real money is and always has been gold and silver. Both have been used for transactions for nearly 5,000 years. Just about as long as capitalism existed. Real money gave regular people a way to work hard and store the energy as capital in the form of an asset that doesn’t degrade and maintains it’s value.   Money must have 3 characteristics to be real money: 

• Store of value 
• Unit of account  
• Medium of exchange    

Fiat money fails at being a store of value. It always has and always will.   Why does this matter to an investor?   Because if you don’t beat inflation, you didn’t gain at all. You have to understand that in order to come out on top in this world now, you have to constantly be increasing your currency, even if you want to just have the same purchasing power that you earned!   

Thanks for reading my quick guide to how the monetary system works. 

Stay tuned for my next Investing Basics article which will be about the history of Fiat currency and money.

If you'd like to learn more about this subject, you can check out another article here.