The illusion of unlimited money and the traps of government funding

The history of money is always a history of power and the temptation to use that power to finance government spending indefinitely. Again and again there were schools of thought that believed that the physical and economic laws of scarcity could simply be overridden by government decrees. Such ideas often promise prosperity without consideration, lead toReality, however, regularly leads to serious economic upheavals. A closer look at the fundamental mechanisms of money creation reveals why certain modern monetary policy theories are in fact only old, long-disproven heresies in new guise.

The thought experiment of a closed monetary system

Let us go mentally into a small, fictitious principality whose wise ruler has introduced a strict monetary system based on gold. In this realm, there is an exactly defined and unchanging amount of this precious metal. There are no new gold mines or foreign trade, leaving the entire money supply absolutely limited and unchanging. The ruler acts aswell-meaning regent who does not want to exploit his subjects, but wants to offer them a stable monetary order and a good infrastructure. It goes without saying that he levies taxes on these comprehensive services.

The mathematical impossibility of interest payment

However, citizens do not always succeed in paying these required taxes on time. In such emergencies, the prince shows generosity and grants loans, but he charges an interest for this. If his patience is exhausted at some point, the defaulting taxpayer often only escapes into the debt of a wealthy fellow citizen, who also only helps against interest, but usuallysignificantly worse conditions. If you look at this situation not from the perspective of an individual, but systemically, there is a fundamental question about the functionality of such a system. If the entire money supply is strictly limited from the outset, how should additional money be created for interest payments?

The Systemic Trap of Scarcity

Even very experienced economists get puzzled when asked this seemingly simple question. The answer, however, is shockingly simple and devastating. Such a system simply cannot work in the long run. A simple calculation example makes this fatal mechanism clear. Suppose the prince lends ten gold pieces and asks for one yeareleven pieces, which corresponds to the original amount plus one tenth as interest.

The irrecoverability of debt repayment

However, only the original ten gold pieces exist throughout the kingdom. Even if the debtor does everything right and works hard, he cannot procure the eleventh piece of gold. Without existing gold reserves that could be dissolved, and without gold inflows from outside, repayment, including the required interest, is simply impossible. The same applies if not the prince,but a rich private individual lends the gold. Even then, the repayment of the loans including interest is systematically excluded, at least for the entirety of all debtors.

Historical teachings and religious prohibitions

This condition is called a systemic interest rate problem or an interest rate clamp. In the past, people also spoke of debt bondage in this context, but this term is historically heavily burdened. It was ideologically charged and racially connoted in the time of National Socialism, which is why it should be avoided today, as it tries to solve a purely systemic problemspecific population groups. Interestingly, the strict ban on interest rates in some religions could be due to this very structural dilemma. Most religious rules have their origin in a problem that can only be eliminated at the societal level.

The solution through flexible loan money

So if there is a requirement not to charge interest, this automatically prevents the systemic dilemma described here. Such a prohibition prevents the creation of an interest rate clamp. Even weakened rules, such as the prohibition of interest only on members of one’s own religious community, make sense against this background, since strangers ideally invest new money in the otherwiseclosed system. The exact cause of the interest rate clamp lies in the exogenous limitation of the money supply. In such a scarcity money system, the money supply cannot be expanded, and thus the funds that would be needed to pay the interest can never arise.

Adapting to the real economy

This changes fundamentally when loans themselves are accepted as money and the money supply adapts flexibly to the economy. The money then arises from economic activity and disappears when it is no longer needed. It is also crucial that interest rates in modern economies do not form arbitrarily, but on the market. A market interest rateaccording to real economic growth. This ensures that just as much money is generated as is needed for the real economic activities, thereby solving the systemic problem.

The return of arbitrary government funding

This system-internal money makes a functioning credit economy possible in the first place. We have now come to know different forms of money and have to turn to a line of thinking that wants to abolish our previous money system. This current wants to reintroduce arbitrary ruler’s money without self-binding. If you pronounce this sentence like that, everyone would immediatelyunderstand how nonsensical this project is. More precisely, it only temporarily helps the ruler to exploit his subjects.

The obfuscation of modern terminology

However, the ideology to be dealt with here does not say this so clearly, but rather conceals its intentions and methods behind a supposedly modern monetary theory. It is therefore also called modern monetary theory, although conceptually it is the old and long believed ruler’s money that it propagates. This theory uses the trick of exposing the public tosuch startling statements that one overlooks the banality of the basic statements when dealing with the details. You have to look at these mechanisms in more detail to see the true background. It is a strategy of distraction that aims to replace complex economic contexts with simple but false promises.

Historical parallels and dogmatic delusion

The history of this ideology is closely linked to personalities who impressed laymen and even non-professionals with energetic dogmatism and original conceptualization of their theories. At the time, many people and politicians in particular welcomed a theory that supposedly provided a basis for the increasing popularity of state-controlled money. During previous major warsin fact, such thinking has often been used to prove that currency devaluation has nothing to do with rising prices. The representatives of these teachings, in almost complete ignorance of the existing literature and the basic logic, believed that their theory offered not only an alternative to the theoretical approach to commodity money, but the only possible explanation for theExistence of paper money. This absurd claim was widely accepted, although the proponents of this doctrine completely failed to conclusively elaborate a non-metallistic theory of monetary value.

The failure of the value justification

The public was dazzled because the seemingly simple answers to complex questions were tempting. Ultimately, however, it remains the fact that an unlimited expansion of the money supply without regard to real economic output inevitably ends in disaster. History teaches us that the attempt to change the nature of money through government decreesalways falls back on the citizens. Anyone who disregards the basic rules of money creation risks losing wealth and destroying the economic fabric. Such theoretical constructs ultimately fail because of the immutable reality of economic boundaries.