DerekVanGorder explains Money for Nothing

All money comes from currency issuers: governments, central banks, and banks. These institutions create money by fiat, by spending or loaning new money into existence.

People like you & I can’t create money by fiat. We’re currency users; we use the money that our institutions create. So this sounds a little unfamiliar to us, but nevertheless, it’s pretty ordinary; new money is created every day, and finds its way into our economy in the form of government spending, or bank loans.

In normal times, the general public prefers to have currency issued to us for work. In our culture, wage labor is considered a morally just and righteous way to receive money, and there is a strong stigma against receiving money for free. Currency issuers go through a lot of effort to satisfy this demand of ours; they use monetary policy to try to achieve a full employment target, so that most people can receive money through wages.

During an emergency, where a lot of people suddenly have to stop working, full employment is no longer a tenable way to funnel money to consumers. The economy will shrink from the non-essential businesses to essential businesses only. But these essential businesses still need customers— even if not all of those customers can be workers for a while. So governments need to come up with another way to get money to consumers, so the economy can keep working…. or else the whole thing will crash.

One really efficient way to make sure people have enough money to spend, is to simply give consumers money.

Lots of people might ask “where is this money coming from?” because they’re used to getting money only for work. But the money comes from the same place as wages do: from currency issuers, who are always determining how much new money enters the economy– whether that’s through the government (3% of money supply) or through private bank loans to businesses (97% of the money supply).

Governments can issue as much or as little new money as they want. But they can’t do so without consequences. If they issue too much money, to allow too much consumer spending, then we get inflation; that means there’s too much money trying to buy too few goods– so the money just becomes worth less.

But if they don’t issue enough money, or don’t distribute it efficiently, we get a different problem: poverty. The economy is delivering less goods to people not because we’re short on goods, but simply because we didn’t print enough money for people to use.

In our society, people care a lot about unemployment, and not too much about poverty. Whenever we commit to reducing poverty, we usually try to have it occur through work (“higher wages,” etc.). People feel so strongly about this, that we come up with stories about how the “real value” of money comes not from goods, or production, but from work.

They warn that if governments “print money” this will cause inflation. Or they might say it’s necessary to tax people who don’t work as hard, before we do any new spending. But the truth is, the value of money doesn’t have much to do with work. And the government doesn’t need to tax anybody before printing money; we’re always printing money, one way or another.

A simple way of summing this up is: it’s not important where money comes from (that has an easy answer). The important question is: does the new money have somewhere to go? i.e. does the economy have enough productive potential, to respond to that new money with goods?

EDIT: this became a popular post. If you’d like to learn more about my perspective on the economy, you can check out my YouTube channel.

EDIT 2: If you’re interested in more on these topics, I recommend checking out Alex Howlett and his Boston Basic Income discussion group.