Making Money

Kevin Cox
4 min readSep 30, 2024

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People believe we make new money by investing, but investments don’t generate money. They lead to a profit or a loss. Profit comes from spending less to produce something than we charge, and it transfers existing money, not creates new money.

Most money today is made when a currency-issuing body authorises a bank to put money into a bank loan account. The loan has to be repaid along with interest, and it is natural to think that the repayment makes the money—but the bank putting the money into the loan account makes the money. The currency-issuing body can allow banks to create money in many different ways, and later, we will explore a scalable, easily implemented, and least-cost method.

New money is like an immediate profit, and governments think that the best way to introduce new money into an economy is to give a company or a person a loan from which they can make profits. The reason is that when the lender repays the money, the repayments are destroyed. However, the interest and fees extending the loan are preserved and become new money.

Unfortunately, it is expensive to introduce new money with loans, as the new money is the loan amount minus the cost of interest and fees. Unfortunately, the cost is double the cost of interest and fees because the common practice of banks is for interest and fees to be loan extensions where the borrower doesn’t receive the money from the loan extensions.

As explained later, the cheapest way to introduce new money is to refrain from destroying it when repaid and not to charge interest and fees by extending the loan.

The Problem with Loans

Loans are expensive because they assume that money generates more money. Money can only create more money when someone invests it so that the investment can make a profit. As the profit is a transfer of existing money, governments have to continue to create money because when money buys something, the thing does not generate another exchange either because it does not create more value or it stops moving.

This means that creating money so it earns money is open to manipulation. In principle, it should work, but it takes a lot of effort and cost to keep it working.

The best way is to create money that has no time value. Investing in it can still make profits, but the profits do not have to cover the money's time value.

The main problem with loans is that only wealthy people can obtain them. The rich do not need loans, whereas people without money do.

How do governments try to fix the problem?

Governments try to fix the problems with taxation and regulation. Unfortunately, in a global world, this is difficult as it is too easy for multinational countries to evade both taxation and regulations.

A better solution is prevention and continual monitoring to keep money exchange ‘fairer’. The suggestion is to distribute new funds to activities that benefit a community rather than to shareholders who use the money to make profits.

Extending loans would be a good start to stopping charging double interest and fees on loans. This would increase the number of people who can obtain loans and reduce the cost of making money with loans.

What else is wrong with loans?

The outcomes of giving to the rich and taking from the poor are many.

For example, it makes many people homeless and kills them while giving vast amounts of money to those who already have money. It destroys communities and turns neighbours against neighbours and countries against countries.

It destroys the social fabric of societies, and it is leading to the premature extinction of humans on planet Earth.

How can we fix the problem?

Stop making money with loans. Instead — in order.

  1. Stop banks from extending loans to charge interest and fees.
  2. Require banks to use existing money for loans to transfer ownership of existing assets.
  3. Require banks to make new money by providing it to local communities so they can invest in new infrastructure for their community instead of funding infrastructure with taxes.
  4. Require regulated large companies to share half their profits with their customers.

Implementation

While local communities can show the way, nationwide implementation requires the involvement of government and government agencies.

  1. The Bank can start by stopping the double payment of interest and fees. This will automatically stabilise inflation by reducing repayments and increasing the speed of money movement.
  2. The Reserve Bank and Treasury should move to agent-based economic modelling, starting with local community funding to exchange existing houses without needing loans.
  3. The Reserve Bank works to prevent new money from being used for home loan transfers and requires banks to supply new money for new homes through local communities. The money must stay in the community under rules like those in FairGo Housing.
  4. The Reserve Bank works with Treasury, ACCC, ATO, and ASIC to determine where banks should direct new money within communities.
  5. The Reserve Bank works with communities to allow local communities to coordinate their use of new money across their local community.
  6. The Government works with businesses to encourage sharing profits, starting with regulated businesses like health, education, research and development, banks, telcos, water, and electricity.

Summary

Loans do not generate new money but redistribute existing money. New money is created when a currency-issuing authority, such as a central bank, authorizes banks to do so, generally through loans. Unfortunately, loans are expensive and economically inefficient. Creating new money with loans leads to wealth inequality, homelessness, and the destruction of social cohesion. Banks issue most loans using new money, while governments and regulatory agencies manage how money flows within the economy. Governments and government agencies can encourage and facilitate the switch to new ways of introducing new money without loans and leave loans to distribute existing money.

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Kevin Cox

Kevin works on empowering individuals within local communities to rid the economy of unearned income.