The Setup
In a very narrow view there’s no money in existence. At least, not like you think of money. The truth is, in every developed or developing society on earth where central banking exists, there’s no real money at all. There are “notes”, essentially IOUs, promises to pay a stated value in what else? More notes.
Love Me, Legal Tender
Although these notes are backed by the good faith of a government, they are not created by that government. They are created by the banks, who issue loans in order to create more notes, each of which is backed by debt, a promise to pay, essentially an IOU. There are usually rules in place to control how much debt--and therefore how many notes--any bank may create.
But aren't those notes created by the central bank, you ask? Actually, no. The notes are created at the local bank every time a new loan is issued. One moment the money doesn't exist and the next moment it does, brought into existence by the loan officer's approval. Banks don't lend out the money they have on deposit or any fraction of it. Banks create new money by fiat, with the stroke of a pen or a few keystrokes.
It's true that most of that new money (new debt) ends up on deposit at the bank where it was created. When you consider that all those deposits represent nothing more than debt themselves, you start to realize that there is indeed no real “money” there. There is only debt.
Look at a dollar and read, in the upper left, where it says “This note is legal tender for all debts public and private”. Think about that sentence, printed on every Federal Reserve Note you have ever seen (unless you’re older). It’s plain as the sun in your eyes, and just as blinding. The Federal Reserve is a private bank, which issues Federal Reserve Notes based on the repayment of all debts public and private. It’s right there on the paper.
As an aside, here is an interesting little-known factoid about banking: What we consider our assets in the form of bank deposits are considered to be liabilities by the bank. What we consider to be our liabilities (loans from the bank) are considered their assets. Both are just different forms of the same thing (debt).
