I, the goldsmith, suggest you obtain the number of coins/notes you require from me. There will be no limit, except for your ability to repay. The more you obtain, the more you must repay in one year's time.
And how will I, the goldsmith, benefit from this?
Since I am providing a service, that is, the money supply, and have costs, that is, producing the coins/notes, I am entitled to payment for my work. Let's agree that for every 100 coins/notes you obtain, you repay me 105 for every year that you owe the debt. The 5 coins/notes will be my charge, and I shall call this charge interest, which is thus 5 percent.
At the end of the year, for all the people who owe me coins/notes, it's time to pay up. Some have more than they borrowed, but this means that others have less, since there were only a certain number of coins/notes issued in the first place. Those who had more than they borrowed paid back each 100 plus the extra 5, but had to borrow again to carry on.
The others discover for the first time that they have something called financial debt. Before I would lend them more coins/notes, I take a mortgage (with interest) over some of their assets, and everyone goes on once more to try and get those extra 5 coins which seem so hard to find.
No one realised that as a whole, the country can never get out of debt until all the coins/notes are repaid, but even then, there are those extra 5 on each 100 which have never been lent out at all. No one but me, the goldsmith, can see that it is impossible to pay the interest - the extra money has never been issued, therefore, someone has to miss out.
It could be so that I, the goldsmith, spent some coins/notes myself, but I cannot possibly spend anything like 5% of the total economy on myself. There are hundreds or even thousands of people and I, the goldsmith, am alone.
Currency itself is not valuable; only the goods and services that can be obtained with it are.
The wealth of any individual or nation is ultimately determined by what is produced in terms of valuable products and services, not by how much currency is printed, distributed and held.
Without production of goods and the offer of services, currency immediately loses its alleged value.
The purpose of currency is to facilitate the exchange of goods and services. Currency is merely an extension of the barter system.
Barter is the act of trading something one possesses or does, for something of someone else’s.
Production and barter is the basis of all economy. They are the necessities for any economy, money/currency is not.
The goldsmith(s) turned already existing barter economies into financial economies. Currency thus, or so it appeared/appears, became/is seen as more important than actual goods and services.
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You have a certain amount of dollars.
You get hungry and thirsty.
What do you do?
Take 20 from those dollars you have and eat and drink them, or do you use those 20 dollars to exchange them for food and drink?
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