Debt-based monetary system

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A debt-based monetary system is an economic system where money is supplied to an economy primarily by private banks, using the fractional reserve banking system.

This form of money is called "debt-based" because as a condition of its creation it is required to be paid back at some point in the future. Since the debt must be repaid with interest in this same form of money, this further implies that the debt can never actually be repaid, unless more money is created through the same process.

In contrast to "debt-based" money, government-issued currency (or fiat currency) is not issued by private banks and is not required to be returned to the government at a fixed point in the future. Similarly, gold and silver and other precious metals have in the past been used as money and their injection into the monetary system is not debt-based, as no obligation for their return is required as a condition of their creation.

Some economists (particularly the Austrian School) and political commentators believe that a debt-based monetary system inevitably creates a superfluous and unnecessary - and unstable - "growth" bias in the economy, as the already indebted are forced to induce new consumers to go into debt so that existing loans can be repaid with this new debt-created money. If this is not achieved the result is foreclosure for those businesses who do not successfully induce new consumers to go into debt for their benefit.

It is therefore argued by a number of monetary reformers that fractional reserve banking inevitably creates a form an economic "survival of those who can induce others into debt", as it forces the economy inexorably towards indebted consumerism and as it continually and steadily pulls in new indebted "consumers", to inject more debt-money into the economy to pay off the existing debts that have already been accumulated by producers.

Many monetary reformers believe that the over-reliance of debt-based money in the modern economy has inevitably created a "bubble" economy, with fundamental, structural instability in financial markets, which inevitably produce waves of booms and bust due to the "bubble-like" credit cycle, where banks lend and subsequently force the return of money from the economy.

Michael Rowbotham, in his book The Grip of Death, argues that the prevalence of debt-based money is systematically concentrating real wealth in the hands of the private banks, as the populace is periodically dispossessed of its accumulated wealth during periods of static or negative credit growth.