No one is immune to debt, and the majority of us are in some form of financial debt (1, 2, 3). Studies show that not having enough money, and especially being in debt, causes serious physical and mental distress (1, 2, 3). This article investigates why banks put people into debt, and uncovers why a world without any debt is completely possible.
In those days, people would deposit their gold for safe keeping with the goldsmiths who issued a piece of paper (or promissory note) for the gold stored. The goldsmiths then loaned the depositor’s gold out to others in the form of further promissory notes, making good profits from the interest they charged (source).
Today, when you deposit money in your chosen commercial bank, the bank also loans out your deposited money to others. This clever system of making profits out of nothing is called fractional reserve lending and is explained simply in our video here:
However, the very first sophisticated banks can actually be traced back to the very first known civilization, the 6000-year-old ancient culture of Sumer in the area of Mesopotamia, where the Sumerian kings used a kingdom’s bank which issued clay tokens as receipts, or promissory notes, for interest repayments made with silver (1, 2, 3).
Kings using banks as a tool to rule over people obviously paints a much more negative picture of our monetary system than evolution from barter; yet if we critique the use of money from this perspective, it becomes clear that it is now the world’s central banks that have this sovereign power of control over kingdoms, or nations, today.
This is because central banks do not carry out fractional reserve lending of money stored in their vaults like commercial banks; instead, their role is to actually create a nation’s official money (or legal tender).
Central banks then loan out that money to the nation’s government, and the people pay back the government’s debt, as well as the interest the government incurs when it borrows the money, via income tax on wages.
The government’s debt is then expanded by commercial banks through loans to the public with further interest. Since the extra money needed to pay back all this interest does not exist, central banks need to keep creating more money so there is enough money in circulation.
This causes the value of each individual bank note to decrease, so prices go up (inflation) and people now have to work even more hours — not just to pay all the interest back, but now also to buy the things they could afford before.