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How Money Really Works

Many of us think about how to make money is that we have to work to make money and with it meet our needs and fulfill our desires. In fact, few of us understand the true nature of money. Money is not, as many assume, a “reserve of value”, but rather a measure of the debt each person owes to someone who has money. So: The more money you have, the more debtors you actually have. This concept is difficult to accept even for many modern economists. To understand this idea, it is best to take a brief look at the origin of money.

It is better to have the concept of money

Trading goods by goods

Almost all modern economic theories about money are wrong. The reason is that these theories are derived from Adam Smith’s book Wealth of Nations. Smith published this book in year 1776, and was named after the father of economics. In short, this book shows how in the past, human beings interacted through commodity trading. In this type of trade, for example, a person with a cow could trade it with thirty chicks belonging to someone else.

The limitations of this type of trading are obvious: there is rarely a need for coordination between needs and goods. In other words, it is not that the individual always has a commodity to exchange with another commodity that belongs to another. Because of this limitation, traditional economic theory has created the concept of money.

When a person asks for something but for which we do not have a good supply, he must offer something to the seller that he can later use to supply his own needs. So it is better to have the concept of money.

Traditional economics says that in the past, there was a steady trade and then money was created because of the existing need; It is easy to understand and it makes sense.

The process works like this: I need what you have, but I don’t have enough money or anything to exchange. Given that money is currently used as a means of measuring the value of anything, I can give you a certificate called a “debt payment certificate” in exchange for sex. You will give me what I need, based on the credit that I have with you, provided I pay them back in due time. If I do not pay in the specified time, we both know that you have the right to reduce the value of my credit (in any way that meets community standards, such as imprisonment or confiscation of property). In this model, money is recognized as a means of representing value and is at the center of the orbit around which economic transactions revolve.

Credit is the foundation of economics

History of money - why did money come into being and how does it work?

Credit has to be considered the foundation of the economy, and it existed long before money became as we know it today. If a person wanted to buy a cow from a person but did not have the commodity that the cow owner was demanding for it, the cattle owner would most likely have given it to him if he paid the price in good time. Although in some periods of human history there was no specific monetary system that could set a price for cattle, the transaction was still possible. This means that the owner of the cow has served the person concerned and owes it to the owner of the cow.

Various anthropological evidence shows that in fact most human economic interactions (before money and trading were now commonplace) were based on credit.

There are countless examples of anthropological research showing that historically debtors have always been indebted to creditors for failing to pay. In many ancient cultures (as well as cultures in some outlying areas with no modern civilization at the present time), if a person did not pay his debt, the creditor could take whatever he thought appropriate (even the life of a person or members of his family).

In other words, creditors have long been in complete control of debtors. We are faced with this issue in the present age, but more humane conditions have been set for it. For example, if you owe the bank and fail to pay it, the bank can take home or part of your salary in lieu of debt. In some cases, it may even force you to resell some of your assets and pay off your debt.

Money, credit indicator

Money represents credit

Since credit existed even before money was created, the question is how did the money come into existence and what does it really represent?

Suppose someone wants to buy a cow from someone. Both he and the cattle owner know that this person does not have what the cattle owner currently needs to give him in exchange. The buyer verbally tells the owner of the cow that he will pay his debt. This may not be a problem in a small primitive society, but what about a much larger and more populous society? Now, what if the cow owner had an urgent need and wanted to exchange his immediate needs with the cow? He probably wanted her to write on a piece of paper and sign that he owed her as much as a cow.

What follows is very important.

The owner of the cow can hand this piece of paper to a third party and get what he needs. Of course, both the owner of the cow and the third party assume that the buyer (who signed the paper) is a good buyer. Now the cow buyer has to pay his debt to a third party as much as a cow.

But what if the third person instead of taking the debt from the buyer of the cow, exchanges this signed piece of paper in exchange for the fourth person’s need and then the fifth person? Anyone who ultimately owns this piece of paper can claim the amount from the original buyer of the cow.

The whole system assumes that the buyer is a good-looking cow and will pay the amount immediately if someone wants to cash in on the paper. This is exactly how our modern monetary system works. If the money is worth it, it is because we assume that the issuer (ie the government) will accept the debt responsibility it represents.

So what is money really?

History of money - why did money come into being and how does it work?

Now that we know that every single unit of money that is in you and me actually represents someone else’s “debt“, we can well explain the concept of money.

If a person has $ 100, he actually has a document showing that others owe him $ 4.

So increasing one’s wealth means that his or her performance as a creditor is stronger in society because the number of debtors is increasing. We know that creditors have more power than debtors. Everyone owes them as much money as others. Anyone who has no money owes you as much money in your pocket.

Many people feel empowered to carry $ 100,000 with them. Why? Because when they have money, they can go to any store and buy whatever they want. That way, they can ask the seller there exactly what they want, as the seller owes them $ 100,000.

So money really represents power over others. That is why we look at the respect or suspicion of rich people. Because either we know the reason for this feeling or we subconsciously realize that we owe it to someone who is far more than our paying power. Someone with $ 100 billion in assets is likely to get everything we have at a great price. So the famous saying that “everyone has a price” is really true!

Why is that? Because anything a rich person buys from us increases our wealth and increases our power as creditors in society.

Thus, as long as everyone accepts money as an indicator of another person’s debt that he or she is willing to pay, money represents power over others. That’s why money is so attractive. Money is literally a kind of power.

Why do we have to make money?

History of money - why did money come into being and how does it work?

We have all heard that “money makes money” and raising initial capital is the hardest thing to do. But why is that? Because a person, after earning a certain amount of money, can use the available capital to owe society, without doing anything at all.

A rich person or company with enough capital can owe it to people who do not have wealth. But how does it do it? It is enough to hire them and pay them for their work and time. Of course, the wages that wealthy corporations pay to these people are always less than the value of what they do for a wage.

Having high capital and money allows a wealthy individual or company to build the infrastructure needed to earn more than the wage paid to the worker. This shows that people, companies or governments that have more money have more power over the poor.

The more money a person has and therefore the greater the amount of debt a person has to a community, the easier it is for a person to get out of debt in a way that will bring them more wealth. This pattern will never change as long as the idea of ​​credit and debt exists. Digital currency advocates who accept Bitcoin and other virtual currencies as a new and viable monetary system are well aware of this.

Why the concerns about “national debt” are unfounded

The United States is responsible for a large amount of debt, and this is the end of an endless political debate. For this reason, it seems that many citizens really think that the United States will soon go bankrupt or that this debt will eventually fall on its people. But this is not going to happen and we should not worry about it.

As we have seen above, money merely represents a “debt payment certificate” that people constantly trade with because it is assumed that the institution that originally issued the official money is good. It may not be necessary to go to this issuer and request its nominal value, as this value can be obtained from anyone else. For the US dollar, you can basically exchange debt certificates anywhere in the world. So the United States actually works like a World Bank.

If a creditor somehow paid off all of our debt directly and at one time, would we be in a bad position? Certainly yes. But did that ever happen? The answer is no. For if that were the case, the whole economy of the world would literally fail to function properly. A country that wants to repay all US debt seems to be committing economic suicide.

Thus, the US national debt (which irrational politicians have always argued about) is an important turning point in the economy.

Digital currency is different from the official currency (Fiat or currency)

Digital currency is different from the official currency

Digital currency advocates point to many of the benefits of blockchain technology and the decentralized nature of the coins underlying this infrastructure. From a purely technological standpoint, such blockchains can solve many problems. But many people seem to think digital currencies are performing better than current currencies ( Fiat ). This is completely false.

The encrypted coins represent exactly what the official currency shows: the amount of debt that people can get. Therefore, the accumulation of digital currency by each entity will increase that entity’s ability to receive debt from the community.

At present, some may claim that digital currencies are better than official currency because they are not prone to inflation. That’s wrong too. Digital currencies are also prone to inflation like official currency. But unlike the official currency that is prone to inventory inflation, digital currency is prone to inflation. In practice, these are no different: they both increase the amount of public debt.

For example, bitcoin value is measured in many cases against the US dollar. This price changes as demand changes. Therefore, the value of bitcoin at any given time is meaningless because it depends on supply and demand.

Anyone who thinks digital currencies are likely to replace official currency soon is somehow superficial. It has ignored the fact that it is extremely difficult to evaluate encrypted assets without comparing them with official currencies.


We have seen that credit (not money) forms the basis of human economic interactions, and money really represents the debt that society owes to a person who has money. We also knew from this context of looking at money, it was easier to understand “why money makes money” and “why digital currencies (or anything else that replaces official money) may not solve the problems of wealth inequality.” We also learned why worrying about US national debt is just a waste of time and energy.

The key message is: Think of money as a tool for managing “credit” that is really important in human economic interactions. All economic systems act as credit and debit developers. So it is useful to think of money as something that is not intrinsically valuable but can be used as a means of interacting with others. Money can help us understand the society we live in and think of new ways to grow and increase wealth.

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