1. The Nature of Money and Debt
John Bradford, Ph.D.

2. What is MONEY?
• First, we must distinguish between MONEY and
MONEY-THINGS, those material objects that
represent or symbolize money to us.
– Throughout history, many things have been used to
represent money.
– Today, most money is virtual or digital money-
electronic entries in bank accounts- not cash.

3. What is MONEY?
• Second, and more importantly, we must
distinguish between WHAT MONEY IS versus
HOW MONEY FUNCTIONS (i.e. what it does).
• Some Functions of Money:
1. medium of exchange
2. store of value
3. medium of deferment (Luhmann; Esposito)

4. Money = Debt, Credit
• Money is first and foremost a unit of account
measuring credits and debts defined by a public
authority. (Keynes, Innes, Ingham, Knapp, Wray)
• NOTE: A ‘DEBT’ PRESUPPOSES A ‘CREDIT’ AND VICE-VERSA, JUST AS A DEBTOR
PRESUPPOSES A CREDITOR, BORROWING PRESUPPOSES LENDING, ETC . They
are like two sides of the same coin.
• MONEY REPRESENTS A SOCIAL RELATIONSHIP OF OBLIGATION, i.e. an
agreement, contract, or quantified obligation expressed in standard 'unit of
account.‘
TOKEN OF DEBT

5. Money = Debt, Credit
Related Definitions:
– Money is a public monopoly; the ‘currency of taxation’
[Wray; Knapp]
– Money is a unit of social obligations [Ingham; Wray]
– Money is credit [Macleod, Innes]
– An Agreement, a contract
– Debt; Debt = a quantified obligation
– Money = debt claim against society [Simmel, Soddy]
– Universally redeemable IOU
TOKEN OF DEBT

6. ‘Taxes Drive Money’
Fundamentals
• Money is fundamentally a unit of accounting; a
unit of measuring credits and debts.
• This unit is determined by a government that
issues currency denominated in this unit (e.g. US
Dollars).
• Money is valuable because governments accept
only their own currency as a means of payment
for taxes (and fees and penalties, etc.)
• Money is accepted as a means of exchange
because people need money in order to pay
taxes.

7. Two Views on ‘Money and Taxes’
Conventional View
• Taxes finance government spending.
Whatever revenue isn’t collected in taxes
must be borrowed by issuing government
IOU’s (i.e. bonds).
‘Taxes-Drive-Money’ View
(Lerner 1943; Wray 1998)
• Governments do not need the public’s money
in order to finance their spending!
Instead, the public needs money issued by
government in order to pay taxes.

8. How Money Circulates
Historical Illustration
OCCUPIED
Rome issues (spends) coins VILLAGE
to Roman soldiers occupying
a village. Rome then
imposes a tax on the
villagers, and the tax can
only be paid in Roman coins!
Now, the villagers will
provision the Roman soldiers
with
food, clothing, shelter, etc. in
exchange for these coins, so
that they can use them to
pay taxes to Rome.
ROME

9. Explaining Public Deficits
• Normally, tax revenue will $10
be less than total
government spending:
TAXES < SPENDING
Government Public
• Why? Governments
cannot collect more
money than they have
created!
TAXES <= $10

10. Explaining Public Deficits
• Step 1: Zero Money (i.e. no $10
credit-debt relationship
between government and
public).
• Step 2: Government spends
money into existence, in
exchange for goods and/or Government Public
labor, thus crediting bank
account reserves.
• Step 3: Government imposes
tax liability; citizens are able to
pay their tax ‘debt’ with
government ‘credit’.’ Taxes
debit bank reserves. TAXES <= $10

11. Is ‘Public’ Debt a Problem?
• A government cannot collect in taxes more
money than it makes available: if all ‘debts’
were paid off, there would be no money left in
circulation!
TAXES < SPENDING
• Deficits are normal, and budget surpluses are
necessarily temporary.
• Unlike households, currency-issuing
governments have no budget constraints.

12. Is ‘Public’ Debt a Problem?
Two Views on ‘Austerity’
Conventional View
• Persistent deficits should be avoided
• Austerity is the inevitable result of
‘too much’ borrowing and
spending, and its ‘remedy’!
• NO PAIN, NO GAIN
‘Modern Money’ View
• Persistent deficits are normal.
• Austerity is unnecessary and self-
imposed.
• ALL PAIN, NO GAIN!
Austerity protests in Greece

13. Explaining Private Deficits
• Banks ‘make money’ by $10
‘making money’, (i.e.
creating new credit from IOU
lending “borrowed”
money, aka leveraging.) Private Bank Public
1. ‘Make money’ = ‘make a
profit’
2. ‘Make money = ‘expands
money supply’
$10 + compounding
interest!

14. Explaining Private Deficits
• In the aggregate, private $10
credits and debts cancel
each other out: no net IOU
money (credit) is created.
• However, because of the Private Bank Public
application of interest,
• CREDIT (of Bank) > LOAN
• DEBT (of Bob) > LOAN
– The original loan amt is called the
loan “principal” $10 + compounding
interest!

15. Explaining Private Deficits
• Question: In the $10
aggregate, where does
the extra money come IOU
from to pay off the
interest??? Private Bank Public
• Answer:
MORE DEBT!
$10 + compounding
interest!

16. Public Money vs. Private Credit
Public (State) Money Private (Bank) Credit
Currency created by state via Private credit created by
“deficit” spending private firms as loans,
Collected (or ‘destroyed’) Collected (or ‘destroyed’)
through taxation. through repayment of loans.
“Debtors” = tax payers; Debtors = borrowers; whoever
whoever has to pay taxes. is originally given the money
Locus of Debt is flexible Locus of Debt is fixed

17. Public Money vs. Private Credit
Public (State) Money Private (Bank) Credit
Value is relatively stable, based Value is volatile, based solely
on governments ability to on the expected ability of
collect taxes borrowers to repay original
loan, plus interest
Facilitates indirect, Generalized Facilitates direct, Dyadic
Exchange Exchange
(potentially) Counteracts Amplifies inequality
inequality

18. Accounting Fundamentals
• In the aggregate, financial assets always equal
financial liabilities.
• In other words,
TOTAL DEBTS = TOTAL CREDITS;
TOTAL DEBITS = TOTAL CREDITS; or lastly,
TOTAL BORROWING = TOTAL LENDING.

19. Accounting Fundamentals
• WHY? One person’s debt (liability) is another
person’s credit (asset).
$100
Banker IOU “Bob”
$100
ASSETS LIABILITIES ASSETS LIABILITIES
Bob’s IOU $100 cash $100 cash $100 DEBT
worth $100 (loaned to Bob)

20. Accounting Fundamentals
ASSETS LIABILITIES AND NET WORTH
Financial Assets (FA) Financial Liabilities (FL)
Real Assets (RA) Net Worth (NW)
ASSETS = LIABILITIES
• “Net worth” is a ‘residual’ category: NW = FA + RA - FL
• TOTAL Net financial wealth = the sum of all financial
assets less the sum of all financial liabilities, which always
nets to ZERO. Why? Because total financial assets = total
financial liabilities.
• However, nonfinancial or REAL assets (i.e. material
wealth) DO NOT SUM TO ZERO- i.e. ARE NOT OFFSET BY
ANOTHER’S FINANCIAL LIABILITY.

21. Accounting Fundamentals
ASSETS LIABILITIES AND NET WORTH
Financial Assets (FA) Financial Liabilities (FL)
Real Assets (RA) Net Worth (NW)
WHY DOES THIS MATTER?
• If total financial assets = total financial
liabilities, then the financial liability (DEBT) of
government must EQUAL the financial assets
(SAVINGS) of the non-governmental private
sector!
• Summary: government debt = private savings!

22. Why Deficits = Savings
Consider three scenarios:
• SCENARIO 1: Govt must balance its budget
– Private sector makes a nuke worth $100. Govt spends $100 to
purchase the nuke. But to purchase the nuke, govt must collect $100
in taxes! The net result is that the real assets (e.g. the nuke) are just
moved from the private sector to the government.
Government Private sector
+$100 ASSETS
payment +Nuke
MINUS $100 in
taxes!
$100 - $100 =
ASSETS
ZERO
$0
Nuke -Nuke

23. Why Deficits = Savings
• SCENARIO 2: Govt deficit spends by creating money
– For example, in this (imaginary) scenario, the Treasury could
spend without borrowing money from the Fed or elsewhere, i.e.
without selling Treasuries, and without incurring debt.
Government Private sector ASSETS Liability
+Nuke $100
+$100
Cash
ASSETS Liability
+$100 --
Govt prints money, gives it to private sector -Nuke
in exchange for nukes. No tax liability is
Note: the $100 is a “liability” of the govt in the sense
imposed! The result is that the net worth of that it is a govt IOU which it must accept back as a means
both parties increases. of paying taxes.

24. Why Deficits = Savings
• SCENARIO 3: Govt deficit spends by ‘borrowing’ money
– The Treasury must raise revenue by selling bonds (‘Treasuries’) to the
private sector (or to a central bank), which is just an IOU. In this
case, exactly the same thing happens as in scenario 2: the net worth
of both parties increases. The only difference is that the asset of the
private sector is in the form of a bond (IOU for cash) rather than cash.
Government Private sector ASSETS Liability
+Nuke $100 Bond
+$100
Bond
ASSETS Liability
+$100 Bond --
Govt prints money, gives it to private sector -Nuke
in exchange for nukes. No tax liability is
imposed! The result is that the net worth of
both parties increases.

25. Money Creation in the U.S.
IOUs (Bonds)
Money as Debt
Federal Reserve Federal Reserve
prints money, from
US Treasury
nothing, and pays
Treasury.
Whatever bonds the other banks do not purchase, the Federal Reserve purchases.
The Federal Reserve can exercise a power that the Treasury cannot: it can simply
print the money from nothing! But it creates this money as public debt, i.e. the
government’s liability to the Fed. This is exactly scenario #3 in previous slide!

26. Money Creation in the U.S.
• In the US, the Federal Reserve
prints “Federal Reserve
notes” which function as legal
tender or fiat money.
• This money essentially
represents debt to the Fed,
(i.e. the government’s
liability).
• US coins, however, are
produced by the US Treasury,
and do not represent debt to
private banks.

27. Money Creation in the U.S.
OPEN QUESTIONS
1. Why does the Treasury have to ‘borrow’
money from the Fed? Would it be better if it
printed the money itself?
2. Since much of the public ‘debt’ is just a
consequence of this law which stipulates
that only the Fed (a private bank) can create Federal Reserve
money from nothing-but not the Treasury- is
the public debt at all important? Or
irrelevant?
3. Finally, to what extent does the application
of interest exacerbate inequality? Does the
universal expectation of growth (implied by
interest) make perpetual growth a
requirement for our economy and hence,
guarantee its unsustainability?
US Treasury

28. Accounting Fundamentals
• Here is what happens when $10 of interest is applied:
Banker’s assets increase $10, and “Bob’s” liabilities
increase $10. This is a net transfer of wealth of $10.
$100
Banker IOU “Bob”
$110
ASSETS LIABILITIES ASSETS LIABILITIES
Bob’s IOU $100 cash $100 cash $110 DEBT
worth $110 (loaned to Bob)

29. Accounting Fundamentals
• The application of interest makes the financial assets
of the banker and the financial liability of the
borrower GROW EXPONENTIALLY.
• Assets still equal Liabilities in the aggregate, but the
net financial wealth of the bank increases by the
same amount as the net financial wealth of the
borrower decreases.
Banker Net transfer “Bob”
of $10
ASSETS
LIABILITIES
Bob’s IOU
$110 DEBT
worth $110

30. Accounting Fundamentals
• Unlike governments and unlike banks, “Bob” can only
acquire the money to repay his liability from
somewhere else. From where?
• In the aggregate, all new money comes either from
the government (in the form of deficit spending) or
from banks (in the form of private loans’).
Banker Net transfer “Bob”
of $10
ASSETS
LIABILITIES
Bob’s IOU
$110 DEBT
worth $110

31. Linking Inequality and Debt
• New money (i.e. credit) is primarily loaned into
existence by private banks.
• Because of the application of interest, total debt
will always exceed the size of the existing money
supply to repay it.
(amount that
can be used to
pay debts)
< (TOTAL DEBT)

32. Linking Inequality and Debt
1. The current system functions like a
pyramid scheme: it is built on the
expectation of infinite,
exponential growth!
2. This is impossible, because
aggregate financial wealth always
nets to zero. (assets=liabilities).
3. Interest payments generally do
not recycle back into the general
population as earned income.

33. Linking Inequality and Debt
• COMPOUNDING INTEREST  INEQUALITY
• Compounding interest means that creditors
exponentially expand their claims on wealth.

34. Linking Inequality and Debt
• The debt pyramid is like a game of musical
chairs: in the aggregate, the total liability
of the borrowers can only be paid off
(cancelled) with the creation of new money,
• New (net) money comes from only two
possible sources:
1. Private banks, which will lend the money, thus
reinforcing the debt cycle, or
2. Government, which can deficit spend, i.e.
spend more than it collects in taxes, thus
adding net reserves to the system.

35. Total Debt-to-GDP Ratio
United States (1976-2008)
Total Debt to GDP Ratio
United States (1976-2008)
2.4
2.3
Ratio
2.1
2.0
1.8
1996 2000 2003 2007 2010
Year

36. Income earned by the top 10%
(1970-2010)
Percentage of Total Income Earned by the Top 10 Percent
United States (1970-2009)
50.0
47.1
44.3
Percentage
41.4
38.6
35.7
32.9
30.0
1970 1980 1990 2000 2010
Year
Source: Picketty and Saez

37. CEO and Worker Pay
CEOs' pay as a multiple of the average worker's pay, 1960-2007
Source: Domhoff 2011

38. The United States does not “borrow”
Dollars from China
• The United States
cannot “borrow” dollars
from China because $USDollars
China does not produce
dollars!
• Instead, China trades
Chinese Goods
their goods in exchange
for US dollars.

39. The United States does not “borrow”
Dollars from China
• Next, China trades these
dollars for interest-
bearing IOU’s (bonds)
called Treasuries. IOU Dollars
• Treasuries are just (Treasuries)
promises to pay back
more dollars in the
future.
• This is basically like $US Dollars
moving one’s cash from a
checking account to a
savings account, that
earns interest.

40. The United States does not “borrow”
Dollars from China
• The bottom line: THE US
GOVERNMENT NEVER
NEEDS TO ‘BORROW’ THE
CURRENCY (MONEY) IOU Dollars
(Treasuries)
THAT IT CREATES IN THE
FIRST PLACE! (whether
from China, or anyone
else) $US Dollars
• Any currency-issuing
government can ‘afford’
anything sold in that
currency.

41. Holders of US Treasury Securities
2010
Other
2%
Here is some actual data Mutual Funds
on who holds US Pension 7%
Individuals
government debt. Funds
12% Banking
9%
More than half of the Institutions
public debt in the US is 3%
owned within the US. Insurance
Companies
Instead of borrowing the Federal Reserve
3%
funds, the Treasury could 11%
have 1. raised the money Foreign
through taxation, or 2. 47%
printed the money
itself, debt-free. State and Local
Govts
6%

42. The countries that own the 47% of foreign-
owned Treasuries
Major Foreign Holders of Treasury Securities 2011
Other
23%
China
Switzerland 26%
2%
Hong Kong
3% Russia
3%
Taiwan Japan
Carib 20%
4%
Bnkng Ctrs
4% Brazil United
4% Oil Exporters Kingdom
5% 6%