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Money is normally thought of as being very complicated. Itʼs no wonder, given how it is created today. So… letʼs start with the basic question. What is money? Specifically what is “cash”?

Under our current system, the foundational form of “money” is legal tender fiat currency originated by the central bank of the country, the printed version of which is a paper note we usually refer to as “cash”.

Strictly speaking, a note is a promise of payment in something else, like gold or silver, or wheat.
However, legal tender notes are notes in name only as they cannot be redeemed for anything other
than themselves. The paper wears out with use and therefore, legal tender notes are redeemable for new notes, nothing more.

As a medium of exchange, it doesnʼt really matter that they canʼt be redeemed for “stuff”. As long as people accept them as symbols for value they function perfectly well as “money”.

To ensure acceptance, the federal government decrees (fiat) that these notes issued by the often
privately owned central bank of the country, are “legal tender”. That means they must be accepted by law for the payment of all debts public and private. So, if you are offered (tendered) fiat notes in
payment of a debt, you have to accept them or the courts wonʼt enforce the debt.

So the next question… What are fiat notes? Are they just fancy pieces of paper the government gets to print and spend, as many believe? No. Life could be very different if that were true.

Fiat currency notes, or “cash” is money created by the central bank. The central bank is usually a
consortium of the most powerful private banks, often international, usually run with token government involvement. It can also be a publicly-owned entity run primarily by personnel from these banks. In either case, the central bank works for the private banking system and determines how much “base money” or “cash” there will be.

This private banking system currency is our national “money”. It can be in the form of national paper notes or it can simply be an account credit at the nationʼs central bank. These central bank account credits are potential cash, that can be printed if need be.

How does the central bank create paper money or “cash” as most of us think of it? It just prints it,
either through a government agency or a private company. Can the central bank just print new money whenever it decides to? Yes it can.

The government has little to no say in these decisions as a matter of “political policy” and, as is
explained below, does its part by putting the taxpayer ever further into debt to pay the central bank for creating this new cash.

How exactly is cash created? All we are ever shown is the image of the presumably government
owned printing press cranking out the national paper money. But that isnʼt how “cash” is created. That is just how it is printed.

The first step in the origin of “cash” is the federal government issuing an interest bearing bond, on
which taxpayers, realistically, will be paying the interest forever to whomever holds the bonds. This is because government debt just grows perpetually and is never paid off.

The bonds are of offered to all, but mostly those with lots of money will buy them, including banks. If the central bank wishes to add to the base money supply or total “cash”, both paper and central bank credit, the central bank will either purchase some of these bonds, or take them as collateral for new cash it lends to the commercial banks via a perpetual buyback arrangement called a “repurchase agreement”.

The cash the central bank creates is simply typed onto a computer screen. There it is… new “cash” or “base money” upon which much more new money can grow.

If paper cash is called for, the central bank has the privilege of being able to issue legal tender fiat
currency notes simply by paying the costs of printing them… mere pennies. It then sells or otherwise provides these notes to commercial banks but canʼt spend the payment it receives, because it has to be able to refund these payments in full to the commercial banks at any time.

Therefore, because it cannot fund itself from selling notes to commercial banks, the central bank is
paid for this service by the interest it receives on the government bonds it bought, or accepted as
collateral. And, after the central bankʼs operating expenses are deducted, the remaining interest is usually refunded to the government.

Central banks can also create new cash in exchange for high quality private as well as government
bonds. This is an exceptional emergency practice soothingly termed “quantitative easing”, meaning creating more cash than the government bonds available will allow.

Interest payments on government bonds ultimately come out of the national income tax, that is to say, the taxpayersʼ pockets. Interest on private bonds ultimately comes out of prices, in other words, the consumersʼ pockets. So it is clear that, either way, the public as a whole pays interest to private parties with sufficient excess wealth to buy bonds, in order for “cash” or “base money” to exist. In normal times, cash is created only to buy government bonds. Therefore, the following pertains to the usual practice of creating cash by the direct or indirect purchase of government debt by the central bank.

Government debt is never paid off. It usually just steadily increases. Government bonds that come
due are replaced with more government bonds much like a Ponzi scheme. So, given that cash is
based upon bonds on which interest will be paid ad infinitum by the public, the source of fiat currency or “cash” under the current system of creating it is, quite literally, public debt increasing forever. Now, there is no reason that government canʼt simply create its own fiat currency debt-free, as many of us imagine it does now, spending it at face value on behalf of the taxpayer. This method of creating money would be as simple and clear as the current method is obscure.

Advocates sometimes try to sell the idea of such government spending as “free money” or a “citizenʼs dividend”. Critics call it “funny money” that is sure to cause damaging inflation.

But neither claim stands up to scrutiny. Money spent into existence on government expenditures
represents value already delivered. Thus it is not “funny” at all. It couldnʼt be more solid. Money spent on a bridge vital to transportation and thus the economy is money representing the value of that bridge.

However, spending such money cannot avoid affecting the money supply and prices and therefore,
depending on whether an economy is in growth or contraction, none, some, all or more than was spent must be taxed back to the extent necessary to keep prices stable. In a sustainable economy with exact monetary balance, taxes would have to equal expenditure.

Failure to tax money out of existence would impose the general and indiscriminate tax on money called inflation. Thus such debt-free spending is not “free money” nor a “citizenʼs dividend” either. However, it could seem so during periods of growth. If the bridge enlarged the economy and the need for money, the money expended might not need to be taxed back. However, over the long term and in a stable economy, the bridge must be paid for in full by the taxpayers just as one would expect.

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