MATTOLE SELF-SUFFICIENCY PROJECT

Problems Inherent in a Debt Money System

The present banking system under the Federal Reserve is termed a "debt-money" system since all money is created thru borrowing (debt). Such a debt-money system is inherently unstable as the following exercise demonstrates.

Suppose that we start a debt-money system from scratch. John borrows $1000 and this $1000 is created by the banking system. However, John also is paying interest on the $1000 and at the end of one year, must pay back $1050 (5% interest). However, there is only $1000 of money in the system. How can John pay back the extra $50?

The answer is that someone else must borrow enough money (at interest) in order for there to be enough money in the system for John to pay the extra $50. Suppose that Jane borrows $1000 just as John needs the extra $50 to pay off his loan. Now there is $950 in the system and, after a year, Jane needs $1050 to pay back her loan. Now Jane is short $100 which must be created by more people borrowing more money.

It is evident that there is no end to this process and the amount of debt must continually escalate.

Last Updated: 23 Mar 2005