How The US Magically Creates Money

Where Does Money Come From?

Every hour of every day

this government facility in Washington D.C. turns paper into money.

In order to keep up with demand

these machines are running 24/7

pumping out more than 500 million dollars into the US economy every day.

But this is only a tiny fraction of how much money is really made.

Most of our money exists digitally

and this number currently goes up by more than 4 billion dollars every day. 

But where does all of this money come from?

Before it ever reached your bank account,  it changed hands countless times

passing through people, governments and businesses

all after being simply typed into existence on a computer.  

We modeled the entire thing to show you how money really works 

and how it drives the country,  inflates prices, and ultimately puts you in debt.  

But in order to fully understand how we got to this point

we need to go back to a time before money. 

The Origins of Money

If a farmer thousands of years ago needed a new tool

he'd go to the local toolmaker to buy one.

The farmer didn't have anything to give him in return

so instead, they both just agreed that he owed him something in the future.

Because the toolmaker trusted the farmer 

his promise of future value was an acceptable form of payment.

Sure enough, 2 weeks later the farmer came back and gave him some food from his farm.  

To make transactions easier, people started to pay using more commonly used items  

like cattle, grain, and salt. 

Everyone needed these things, but they were hard to come by

by and that's what made them valuable.

The farmer could now buy a tool and pay for it right away

using a precise amount of grain that seemed like a fair exchange

this made transactions quicker  

and both parties would leave with something valuable to them.

But eventually the demand for trade was too much  

and paying with a random mix of bulky  objects wasn't good enough.

People eventually settled on using metal coins like gold and silver

 since they were small, extremely valuable, and would last forever unlike cattle or grain.

Suddenly, trade around the world opened up  

and things were being bought and sold all the way from China to Europe.

But traveling with so much gold became heavy and dangerous.

This was when the whole idea  of money started to change.  

The Invention of Loans

In 17th century London

trusted goldsmiths started to take in people's gold coins

promising to look after them for a small fee.

In return, they would give the customer a piece of paper

a promise note that allowed them to retrieve their gold at any time.

The key to this piece of paper  

was that the customer could go to any goldsmith in any town

and claim back that exact amount of gold.

The paper itself had no intrinsic value 

but it became as good as gold. 

The notes were so convenient that people started simply exchanging them

to buy and sell things.

The goldsmiths realized that most people weren't actually coming to retrieve their gold

and so they started loaning out fake promise notes to customers

instant money that had to be paid back with interest  

making the goldsmiths a small profit.

This was fake money that didn't actually come out of their gold supply.

If a goldsmith loaned out 100 coins they wouldn't become 100 coins poorer 

they'd simply write the customer  a fake note that was worth 100 coins

which could be spent anywhere.   

Eventually, the customer would pay back the loan plus the fee

making the goldsmith 105 coins richer.  

On top of that, the customer would spend their money

by paying someone for goods, making them richer.

From that single loan

the total money in existence increased  by 100 coins, yet no new coins were produced.

This meant that more money was in people's hands than actually existed.

As long as everyone didn't come to cash in their notes at the same time

everything would be fine.  

If we replace the goldsmiths with banks 

and the promise notes with digital money 

we have today's system of money.

Nowadays, almost everything is bought and sold digitally

but did you know that data brokers buy and sell your own personal data? 

This could be used against you for things like scams, identity theft, stalking and harassment. 

On top of that, when marketing agencies get a hold of your data

they start sending you a never ending supply of spam.

The good news is that you have the right to protect and remove your personal info.  

All you need to do is sign up with DeleteMe, today's sponsor 

and they start searching and removing your personal details

from hundreds of data brokers.

You'll get a breakdown of how much data has been removed 

and where it has been removed from.

DeleteMe will work continually throughout the year  

to keep your data away from these data brokers.

They also have a family plan

to protect your loved ones  from the same problems.

To remove your data and protect yourself

visit joindeleteme.com/space and use the code 'Space' at checkout

to get 20% off.

Why Banks Create Money

When the 17th century goldsmiths started handing out fake money

it had a profound effect on the economy.  

Before, no new money could enter the system and so the money that did exist

was simply passed around in a cycle whenever a transaction was made. 

But this system had a major flaw.

Imagine a group of four people who have a total of $100 between them.

If person one pays person two for some food 

it moves the money around making it uneven. 

Then, person 2 pays person 4 for a service 

and the money moves again.

Note that every time money is passed around value is made and productivity grows 

but eventually, the money supply  becomes uneven 

and less people can participate

slowing down trade and reducing productivity.  

This system only works if everyone pays each other the exact same amount

at the exact same time 

something that is impossible in the real world.

By adding more money into the system

it speeds up the economy allowing businesses to grow 

products to be made

and ultimately, advances our civilization.

And so, a constant flow of new money is crucial in our current system.

But how is this actually done?

We think of banks as places that store our money and keep it safe

but that's not really what's going on.

When you give a bank your money, they are in debt to you

The numbers you see in your bank account 

aren't real wads of cash sitting in a vault.

They are simply promise notes showing that the bank owes you money

and that you can claim it back whenever you want.

A loan is the exact same, but in  the opposite direction.

When Banks lend us money we are in debt to them and we have to pay them back. 

This is where money really gets made.

Just like the goldsmiths

How Banks Create Money Out of Thin Air

when a bank gives out a loan they  don't get poorer

they simply type new money into your bank account.

It's brand new money that didn't exist before.  

The only difference is that when you pay it back 

the money gets canceled out and the  bank only keeps the interest.

Debt, Inflation, and the Economy Explained

But with that loan, you paid for a new car

and that money eventually made its way to the employees of the dealership.  

Then, they spent that money and it continued to create hundreds of new transactions 

powering businesses, creating new technologies, and providing us with food.

All of this value and productivity would never have happened  

if new money hadn't entered the system. 

The problem is that productivity doesn't necessarily increase

when we create new money

and that can cause inflation.  

If society starts producing fewer goods but more money is added into the system  

prices will go up

since there is more competition for fewer goods.  

Because of this, banks have to limit how much money they create.

The Role of the Central Bank and Government Bonds

In the past

they could only lend out a portion of the actual cash they had in their backup supply.  

Nowadays though, banks have  almost complete freedom  

to create as much money as they like.

If they are running low on backup  money they can simply go to the central bank  

and ask for more money

and that's where things get ridiculous. 

To create new money, the government creates a bond 

which is essentially a loan that  provides a steady income.

Banks, corporations and foreign countries  

buy these bonds from the US government 

and this influx of money goes toward the government's budget.

The government uses this money to pay companies and people 

and it eventually makes its way back to the banks. 

The problem is, the US government almost always spends more money than it makes

so it is constantly in debt to those that buy bonds.

In order to pay for that debt 

it uses the taxpayers money.

Last year the government spent almost 7 trillion dollars

but your tax money wasn't enough to pay for this.

And so the government had to create new bonds to receive more money 

putting it further in debt, and the cycle continues.  

As crazy as it sounds, this system of adding more money through debt

is how most of the world operates.

It isn't necessarily a bad system

it's just not running anywhere near  maximum efficiency. 

If banks created money for more productive things 

like businesses, education and  infrastructure  

all of this money going into the system

could give us higher returns in the long run.