A beginner’s guide to understanding the nature of money

In 2021 British Chancellor of the Exchequer, Rishi Sunak, announced plans to create a Central Bank Digital Currency (CBDC). This would be a new form of money, that some claim would have aspects of the Chinese Communist Party’s Social Credit System. Under the CCP’s Social Credit System dissidents score low and are prevented from fully participating in society, for example by being prevented from using high speed trains or flying. In essence it is not a medium of exchange but a system of coupons. If you are out of favour with the government, they will restrict what you can buy and how you spend your ‘money’. How this plays out remains to be seen but given that few people understand money as it exists today it is worth examining the nature of money as it currently exists.

There is a common-sense narrative surrounding the origins of money first elucidated by Aristotle and centuries later laid out by Adam Smith which goes something like this. Primitive peoples originally used barter but when economic activity became more complex money emerged because barter was no longer fit for purpose. But is this narrative correct? Felix Martin in his work Money: The Unauthorised Biography has this to say on the subject,

“In primitive times, there was no money – just barter. When people needed something that they didn’t produce themselves, they had to find someone who had it and was willing to swap it for whatever they did produce. Of course, the problem with this system of barter exchange is that it was very inefficient…Because simple and intuitive though it may be, there is a drawback to the conventional theory of money. It is entirely false… Seek as they might, not a single researcher was able to find a society, historical or contemporary, that regularly conducted its trade by barter.”[i]

David Graeber in his book Debt: The First 5,000 Years, concurs with this view when he states,

“The story of money for economists always begins with the fantasy of barter. The problem is where to locate this fantasy in time and space: Are we talking about cave men, Pacific Islanders, the American frontier?… For economists it is a very real sense the most important story ever told… It really has become ubiquitous. Wherever we find money, we also find the story… The story then is everywhere. It is the founding myth of our system of economic relations… The problem is there’s no evidence to suggest that it ever happened, and an enormous amount of evidence suggesting it did not.” [ii]

Thus, one of the founding myths of modern macro-economics is a work of fiction. This is entirely appropriate given that much of what passes as ‘the dismal science’ is actually epic fantasy on the scale of Lord of the Rings, Harry Potter or Games of Thrones. Of course, myth when repeated often enough and with great conviction by economists becomes accepted as truth, but that doesn’t make it true. According to mainstream neo-classical economics there are commonly three possible functions of money that are identified:

  1. a medium of exchange
  2. a unit of account
  3. a store of value

However, economists commonly fail to identify, either due to myopic vision or by deliberate misinformation, money as a means of social control; a way for a narrow elite to exert power over the masses. But whether by design or by accident money, in its current form, is used as a means of exerting power and control, and yet this is rarely, if ever, mentioned on economics courses or in economics textbooks. Why not? Do economists not see it? Are they hallucinating a parallel reality where debt-based currencies are objectively neutral tools? Are they living in denial or is this a deliberate obfuscation of the very real nature of money in human society? Whatever the exact answer to this question, the non-identification of debt-based money as a tool of power constitutes wilful myopia, incompetence and/or deliberate propaganda by the majority of mainstream ideological capitalist macro-economists.

      Despite the fact that money, in both paper form and electronically, is used by the majority of humans on a daily basis, few of us actually understand what it really is and how it is created. Thomas Greco in his 2009 work The End of Money and the Future of Civilisation has this to say on the issue,

“Money is clouded in mystery and there are few who really understand it. It is not that it is so difficult to understand, but because it is made to seem that way by financial journalists, bankers, and monetary economists who speak an obscure language, indulge in superficial speculations about market and policy changes, and behave as if the wizards of Wall Street were possessed of some superior form of intelligence.”[iii]

But they aren’t possessed of some superior form of intelligence, and the reality is that in almost every country on Planet Earth today money is not pegged to any real resource, such as gold, but are fiat currencies created as debt by bankers; loaned into existence as part of a system of fractional reserve banking. To properly understand the myriad dysfunctions of ideological late-stage Capitalism and to begin to look for the solutions to those dysfunctions, it is necessary to first understand the reality of money as it exists today. The terms fiat currency and fractional reserve banking and debt-based currency are of fundamental importance to this understanding. Make no mistake, the banksters[1] have laid a fearful enchantment over the global financial system and, therefore, the vast majority of the human race.  If we wish to shake off the shackles of this fearful enchantment of debt-peonage/wage-slavery, we first need to understand this enchantment and then we need to take wise, informed and decisive action. The financial trading house IG define a fiat currency thus:

“A fiat currency is a national currency that is not pegged to the price of a commodity such as gold or silver. The value of fiat money is largely based on the public’s faith in the currency’s issuer, which is normally that country’s government or central bank.”[iv]

There are several important issues here: the currency is a promissory note not actually backed by any physical resource; if the public lose faith in the currency, it becomes worthless; and the issuing authority, despite what the trading house IG state in their definition, is usually, although not always, a private bank. In the USA the Federal Reserve Bank, is in fact a private bank, for example. The website Investopedia defines fractional reserve banking thus:

“Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital for lending.”[v]

This system was established after the Great Depression to increase the money supply and reinvigorate the global economy, but it has morphed and/or been manipulated over time and taken on a life of its own. Governments limit the amount of money banks can create to a certain fraction of deposits that they physically possess, and this is known as the ‘fractional reserve requirements’ (the ratio of how much it can lend based on its own reserves). This ratio varies between governments and across time; a simple example can illustrate this.

Step one: a new bank is created, and its owner deposits $1111.12 of his own money and the reserve ratio is 9:1. A person enters the bank wanting to borrow $10,000 to build an extension to their house; since the bank has 1/9 of this money in actual reserves, it can legally create $10,000 by typing this into a computer and lend it to the borrower, which it does.

Step two: the person pays the builder $10,000 for the work, and the builder deposits the money at their bank; that bank can then create $9,000 based on this deposit, which it can lend out to a new customer, which it does.

Step three: this money can be deposited again at a different bank and be used to lend $8,100. This process can continue many times until someone does not deposit their money at another bank, and theoretically, almost $100,000 could be created as debt money from the original deposit of $1111.12. The banks have an incentive to attract deposits so that they can create debt money, which gives the misleading impression that all loans are taken from actual deposits, which largely, they are not. If this system seems like a confidence trick or ‘voodoo economics’ to you, that’s because it is, but don’t take my word for it: go and research it for yourself.

      Money as it exists today is loaned into existence by bankers bearing debt. It is as simple as that. Let’s use an example to illustrate the point. Ten businesses go to a bank and ask for a $1,000,000 loan, and the bank agrees to these ten loans, but insists on charging 10% interest, which the businesses are obliged to accept if they wish to receive the loans. The bank then ‘magically’ creates $10 million effectively out of thin air (they simply type it into a computer and et voila! it exists) and distributes it to the ten companies. But it simultaneously creates $11 million in debt (the principal and the interest). Therefore, $10 million circulates in the economy, but $11 million exists as debt, so there is simply not enough money to ever repay the totality of the loan. Although the circulation of money gives the illusion that the debt can be repaid and parts of it can be, overall, the debt always increases. Multiply this example hundreds or thousands or millions or billions or trillions of times and you can begin to understand why so much debt exists in the financial world.[2]

Under this economic system, debt always exists in this system and can never be repaid; some people/businesses/countries will be paying back loans forever, and some businesses must go bust; it is an inevitability. To imagine that this system can deliver just societies or environmental sustainability is, perhaps, a classic case of insanity. It is fundamentally a toxic system of debt slavery and non-debt based currencies, such as Copiosis[3], are part of the solution not CBDCs.


Graeber, D (2012) Debt: The First 5,000 Years Melville House

Greco, T Money (2001): Understanding and creating alternatives to legal tender Chelsea Green Publishing Co

Martin, F (2013) Money: The Unauthorised Biography The Bodley Head

[1] Some people may quibble over the term “banksters” (a hybrid of bankers and gangsters), but given the toxic system they preside over it is entirely appropriate.

[2] I recommend the documentary Money as Debt, which discusses fractional reserve banking and debt-based currencies and is available on YouTube. It will be one hour of your life very well spent.


[i] Martin P. 9-10

[ii] Graeber P. 23-28

[iii] Greco (2009) P. 100

[iv] Accessed 12/11/2021.


Accessed 12/11/2021.

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