The concept of money is a bit strange. So strange, in fact, that most people don't try to understand what it is. I mean why bother? As long as your money rests safely in a bank and you can draw on it when you need to, what's to understand?
Well, the first thing needed to be understood is that your money is not like Harry Potter's stash of gold at Gringotts. You can't just walk into a bank and demand to see your money. They print out an account balance for you. Okay, but that money's got to be stored somewhere, right?
Actually no. When the dollar was pulled off the Gold Standard in the 1970s, your money was made by and out of debt. The very first bankers were goldsmiths. Their vaults were the most secure place in a town, due to the nature of their trade. When other people in the town had gold on hand they wanted to keep safe, they could store it in the goldsmith's vault for safekeeping.
Goldsmiths eventually discovered something interesting: not counting a strange economic disaster where everyone came to collect their gold at once, they only needed 10 percent of their gold on hand to give customers who wanted their deposits back. The rest of it they could loan out.
This eventually came to be known as "fractional reserve lending", where a bank lends out 90% of its deposits. The problem with gold is that there is only so much of it. At a certain point, there will be no more gold to lend. Credit, on the other hand, is limitless.
Check this out: Say you sell a house for $100,000. You deposit this money in your bank, and so the bank has $100,000 on its books. They lend $90,000 to a woman named Mary so she can buy a home from John. John takes that $90,000 and deposits it in the bank as well. So now the bank has $190,000 of deposits on its books. Where did that $90,000 come from? There was only $100,000, but now all of a sudden an extra $90,000 appeared out of thin air.
But wait. Say that Mary pays back her loan. At 6% interest for 15 years, she's paid the bank back plus an extra $46,700. So now $100,000 has become $236,700.
Except it's not, because the bank loaned out 90% of John's $90,000 deposit and magically created $81,000 when it gets deposited back into the bank. Plus, the bank reloans $90,000 from the original $100grand. And so on. And so on.
Do you see the problem? Banks can turn $100,000 into 1 million dollars out of nothing. There is no gold behind that money. There isn't even printed money behind that money. It's all merely ones and zeros on a computer that somehow we've determined has actual value.
This is the system upon which our economy is based. For our economy to grow, our debt has to grow. The problem with debt, however, is that it must be repaid. Go back to that $90,000 loan the bank invented out of nothing. The bank did a little sleight of hand and poof, here's 90 grand. The problem is that working at minimum wage (if you paid no taxes and didn't have to worry about cost of living expenses), that $90,000 is worth more than 12 thousand hours worth of work.
In a debt-based economy, in order for one person to pay down their debt, another person has to increase their debt. Absolutely no work is required to create the debt upon which our economy is based, but excessive work is required to keep our debt-inflated economy afloat. This is a really big, bad problem.
And this problem is even more complex than you think. The Federal Reserve System (which issues Federal Reserve Notes, which you'd call dollars) is the bank of the United States. Except it's not a bank, it's a system of 12 regional banks. And the stock holders of these 12 regional banks are all privately owned banks like Chase, and Bank of America, and Citicorp.
That's right, The Fed is a privately owned banking cartel, not a government agency.
When people mention how deep the government is in debt, who do you think America owes money to? Yep, the Fed.
Yet the problem is even more complex. Banks (yes, the private ones that make up the Federal Reserve) managed to come up with ways to take these loans and package them into derivatives and hedge funds and then make money off of them on the stock market. At least, they did before the first credit bubble - the housing market - popped. There's still a few credit bubbles left to burst, and the popping of only one triggered global recession.
It is vitally important that we understand this because we can't come up with solutions until we first understand the problem. And unfortunately, the solution is not to peg the dollar back onto gold. There isn't enough gold in the world to pay off our debts.
If you want to learn more, I strongly suggest visiting The Public Banking Institute and reading the very excellent book Web of Debt by Ellen Brown.