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Beyond Creating Gold From Lead: America’s Ability to Create Money From Debt

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By William Clements
December 8, 2019

For many, the field of economics and finances are thought to be too complicated, too comprehensive and too difficult to understand.  It could be argued, with a certain degree of conviction, that this idea has been perpetrated against the American public and other international governments, with bad intentions. While the author will not attempt to unpack the various concepts involved in the global banking system, this will be an attempt to only show the relationship between debt and money. There will be special attention given to the creation of money, the interdependency of debt and money supply and, finally, the potential impacts that these practices can and will have at the federal, state and local government levels. Fear not, this will not be a complicated piece that is marred with jargon. This piece should serve as a beacon of light to shine within the dark corners of the American civic to encourage an understanding of domestic and international banking.

We have heard much-a-do about the national debt in America. Currently, the United States has a total debt of a whopping $23 trillion. However, it is very important for us to note the role of the Federal Reserve and the Treasury Department before panic moves in and takes hold. Now, it is well-known that commercial banks and the Central Bank have discovered the sacred alchemy  The early goal was to turn lead to gold, but we have accomplished something much better. We have learned to create money from debt!

It is helpful that we begin with a clear understanding of the different types of money. The four types of money supply are:

Commodity money – This has an intrinsic value. An example of commodity money is the exchange of gold.

Fiduciary money – This is generally accepted as a medium of exchange due to the lender’s confidence that the commodity will be given back to him or her upon the borrower’s request. An example of this type of money is a check of some sort.  

Fractional or Commercial Bank Money – This money is created out of debt. However, the bank is required to maintain a certain percentage of reserve funds to ensure that depositors can receive their deposits. It is worth noting that this percentage is usually well below 5%. This type of money will be of importance in this piece.

Fiat Money – Money that only has value due to the government declaring it as legal tender. It is worth noting that there are no assets or commodities which back this form of money. The money is valuable only because of the governmental requirement that it must be accepted as legal tender.

For the purposes of this piece, it is important to note that the United States, since 1971, has used a fiat money system. This move to a fiat currency was implemented by then President Nixon. Nonetheless, the history of the fiat money system has a long history with some very discouraging consequences. For example, during the American Revolution, the Continental Congress issued a fiat currency called the, “Continental Currency,” which resulted in economic disaster. For example, in the Carolinas, the inflation rate reached 900% and in New Hampshire 1200%. It is not the aim of the author to suggest that the current economic condition is likely to result in extreme rises in the inflation rates. However, there is something else worth observing that adds a degree of sobriety to the conversation.

Describing the inner workings of banks and the many steps involved in the sacred alchemy is beyond the scope of what this work can address. Some internationally abreast readers may recall the hyperinflation that occurred in Zimbabwe during the turn of the century and suggest that there is a natural cycle of currency correction. Essentially, printing fiat currency with no commodity of intrinsic value or tangible asset to back it up is destined for failure. While this may be true, it is important to note that Zimbabwe did not have an institution as powerful and influential as the Federal Reserve.

 At this point, you may be wondering how exactly this process occurs. First, when bankers make deposits the same funds are used to make loans. Suffice it to say that the when the United States Treasury borrows funds from the Federal Reserve, the Federal Reserve creates that money. This process is known in macroeconomics as, “Monetizing the debt,” which will be explored in next month’s piece.


 Author: William Clements, Ph.D., is a Professor of Criminal Justice and Psychology at higher education institutions. He possesses a Bachelor of Science degree in Justice Studies, a Master of Science degree in Forensic Psychology, and a Doctor of Philosophy degree in Public Policy and Administration. He is also a Fellow at the Institute for Polarities of Democracy. He has served in the field of public service for a total of 12 plus years and is a well-read enthusiast for topics of economics, politics, homeland security, and most of all, public policy. Email: [email protected]

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The American Society for Public Administration is the largest and most prominent professional association for public administration. It is dedicated to advancing the art, science, teaching and practice of public and non-profit administration.

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