http://www.gold-eagle.com/editorials_02/champeau011402.html Money - Part I At New Year's Eve dinner I asked my friends "Where does money come from?" My veterinary friend, college educated, did not know, No one volunteered an answer. Of course most readers of Gold-Eagle know that in today's world money comes from debt. I explain that every time someone takes out a loan from the bank new money is created. But I also like to try to explain to them why this is a system in self-destruct mode. So I describe the following scenario. Assume that 8 people are sitting around a kitchen or dining room table. "Let me describe our monetary system in simple terms. Pretend we are our own little community. We need something to allow us to do business together. We need a form of money. So, I will be the central bank. I will loan all of you 100 Dave Notes (DN) at 5% per year in exchange for the right to some of your property. "Now, we all do business with each other for 1 year. After the year is up you all owe me 105 DNs. See the problem? You may be able to pay me back to original 100 DNs. But where does the other 5 Dave Notes come from? It can only be worked off. You will be my slave until you work off your debt. Or you can exchange me some of your personal property." At this point you get a lot of heads nodding and the idea sinks in. Then we continue. "Now, let's say that Mary is an astute business women and she has 150 DNs and Tony only has 50 DNs. Mary can pay me back the 105 DNs or she can pay me only the interest of 5 DNs or something in between. Let's say she only pays the interest. Tony on the other hand, needs more money to stay in business, so Tony, I'll tell you what, I will loan you another 100 DNs at 5% and next year you will owe me a little more than 215 DNs total or 15 DNs in interest. "Now, something very important just happened here. What was it? (Pause) We just INCREASED THE MONEY SUPPLY. What's this called? Inflation. Each new loan, without an equal loan payoff, increases the money supply. "So in our little community we now have 895 Dave Notes floating (Mary paid me 5) instead of the original 800. "Now, what would happen if all of you tried to pay me the full amount of your loans? (Pause) Two things, first, you cannot. There is not enough money to pay all the loans off plus interest, therefore, I will continue to make new loans to people in need. Second, if you do pay off most of your loans, there will not be any money in circulation to do business. If you pay me back a substantial portion of the loans, there will be no money and we will have to revert back to a barter system. It is not in my best interest, as your banker, to have you pay be back the loans in full because I cannot collect any interest. "So the next time a politician says that he wants to pay off the national debt, either he is a liar or he does not know what he is talking about, probably both. " This little scenario has worked quite well in describing to lay people how our current monetary system works.