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Comment by jazzyjackson | Hacker News Reader

I'll give a crack at some cliffnotes:

A debt is a very natural thing for humans, because we feel compelled to provide value to people who can't pay us yet.

Even before money people had gifts and favors - we give with the expectation that we'll be given something in the future - or we say 'you owe me one' when someone has helped us through an issue without sending us an invoice.

So the genius of fiat currency is that you get to represent these IOUs as a standard, fungible currency, such that I can take the debt you owe me and transfer it to someone else, so now you owe them. Being able to trade debt like this essentially turns debt into the currency.

The benefit of this being that economic growth is not limited to how many gold coins we can mint -- we can become as indebted to each other as we like -- the more people go into debt, the more money we have to trade. Pretty neat.

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Each IOU is actually a promise to work. Before money it could have been 'I will work for you 30 years' and if someone believes that, they can trade that promise for a nice house for the person to live in. A promise is basically analogous to a debt.

In todays world, the promise is made to a lender (a bank), which then creates a fungible IOU, i.e standard currency for that promise, which can be exchanged for equivalent amount of work.

The whole system is a collective promise to work, and that keeps the society running.

That's a very cool way to think of it, thanks

The problem is that if everyone were to try to collect all the debts owed to them, there would not be enough currency to fulfill it all. We freely create debt, but the result is a deficit that can only be resolved by creating enough value to offset the debt. And if that is somehow infeasible, economic collapse occurs.

Currency is debt. If you have a 20$ bill that means essentially that the government owes you the equivalent in value. If everyone converted all their debt to currency that just means the state buys all the debt and prints sufficient government IOU’s (bills) along the way. If there is not enough value to cover the debt, the notes just lose value as others refuse to trade them at their previous rate.

> If you have a 20$ bill that means essentially that the government owes you the equivalent in value.

This may be true in some theoretical sense, but in practice, it is hard to believe. How would I go around to make the government accept my 20$ and give me some equivalent of that? What could government possibly give me for my 20$?

Dollar bills are for buying things. I could go to a store and buy a bottle of expensive wine for that bill. But I wouldn't say the store owes me.

The government accepts the $20 as a legal way to pay your taxes, or other government fees.

That is true. But if the only way a government owes me something is that it has to accept dollar bills to erase my tax/fee duty, then I think this proves my point - the government does not owe me equivalent of those bills, it only has to accept them for limited set of "services".

"I could go to a store and buy a bottle of expensive wine for that bill. But I wouldn't say the store owes me."

That's a misunderstanding. A $20 bill is the government's liability, not the store's liability. You and a third party are using government liabilities as a currency. Every $20 bill is on the liability side of the central bank's balance sheet. Every entity accepts its own liabilities as a form of payment. Governments issue currency which they then must accept as payment for taxes. Banks issue credit which they then must accept as payment for debt service.

https://www.youtube.com/watch?v=TDL4c8fMODk

Interesting video, but can't help to notice it paints too simple and dandy picture and probably has an agenda behind it. If you read the comments, not everybody believes in this "the government created the money so there is no problem in creating some more" idea. In principle yes, the government has that power. But in practice, this is being prevented by powerful people in and out of government and only gets a pass in special cases (like saving the big banks yes, funding public healthcare no).

The answer is gold. Your $20 is worth a certain amount of gold, and that is what the government owes you. $20 in gold. These days you'd be hard pressed to get the government to give you gold, of course, but that is the answer to your question.

As an example, British pound notes have the wording "I promise to pay the bearer on demand the sum of five [ten/twenty/fifty] pounds", which dates back to a time when you could actually exchange the notes themselves for gold.

This used to be more literally true: https://en.m.wikipedia.org/wiki/Silver_certificate_(United_S...

Not quite... https://www.history.com/this-day-in-history/fdr-takes-united...

> If you have a 20$ bill that means essentially that the government owes you the equivalent in value

As the book delves into, it may actually be the opposite. A bank borrows the original 20$ from the government. This allows the bank to create a 20$ bank note to be loaned out, and as long the government doesn't demand their money back, it can continue circulating in the economy. The bank notes get traded and becomes the currency, which is how many paper money currencies was created according to the book. The problem arrives then when a single nation has bank notes from several different banks, so in order to solve that problem the government then grants a single bank, let's call it a central bank, the monopoly of borrowing money from the government from which all the other banks then borrow from.

A key point here is that the central bank can not be part of government in this scheme since then it would be the government borrowing money from itself. When people talk about money as an illusion, this is one of the larger aspects to it.

”If you have a 20$ bill that means essentially that the government owes you the equivalent in value”

That was true in the days of the gold standard (https://en.wikipedia.org/wiki/Gold_standard), but nowadays, i don’t think it is true anymore.

You can’t bring your 20$ bill to the government and get goods in return whenever you want to make such an exchange.

Also, a lot of money gets created by banks, not the government (in the USA, all the money, I think. Isn’t the Fed independent?)

> a lot of money gets created by banks

Interesting, how does that work? Can a bank create money to pay its own taxes? That sounds too convenient...

They could (think of it: a bank could just tell government that it has more money in the bank now, or tell another bank that they transferred an x amount to the government’s account there), but regulations forbid it and various controls work hard to prevent it.

A bank creates money when it borrows you money that isn’t fully backed by saving account(s). See https://en.m.wikipedia.org/wiki/Fractional-reserve_banking, which, a.o. says:

”Because banks hold reserves in amounts that are less than the amounts of their deposit liabilities, and because the deposit liabilities are considered money in their own right, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying base money originally created by the central bank.”

The amount by which a bank can do that is regulated, and, in the end, under control of the central bank. The central bank won’t be involved in every minor fluctuation of the amount of money in circulation, though.

Currency is physical tokens of value for trading money. Money is a system that fulfills several criteria: unit of account, medium of exchange and store of value. Not debt in any meaningful sense, apart from systems that lack trust for store of value or stability for unit of account, in which case explicitly linking to another less easily gamed asset is supposed to increase trust.

Debt can be money if the legal system is sound. But money doesn't need to be debt if the money issuer is trusted not to debase the currency.

A owes $100 to B. B owes $80 to C. C owes $80 to D. D owes $90 to E. Total debt is $350.

A pays $100 to B. B keeps $20 and pays $80 to C. C pays $80 to D. D adds $10 of his own money to pay $90 to E. Everyone's debt has been repaid, but only $110 of currency is needed for all these transactions to take place -- assuming all debts are paid in cash. All you need is sufficient liquidity.

I could loan you five quadrillion dollars provided that you also loan me five quadrillion dollars. No currency has changed hands, but we've just increased the world's total outstanding debt by ten quadrillion dollars!

This is like summing up temperatures of stars. It makes no sense to do that.

When you have a group of subjects that are indebted to another, separate subject, then it makes sense to calculate the total debt.

Or society works because people do things for others without expecting repayment and there’s enough social pressure for the vast majority to not exploit that system.

Problems really only arise if debt is systemically expected, like a housing market that works only on a foundation of mortgages.

Currency is just a fungible way of trading value. It means you don't need to use barter. A government could easily print enough currency to represent all the debt available, but they'd want to own the corresponding assets and income streams in return.

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