Paper money, in its most basic form, is just that—paper. On its own, it has no intrinsic value for those who choose to save in it. The only reason paper money holds any value is because it is widely accepted as a medium of exchange in the economy. But beyond its physical form, paper money also exists in digital form as credit, represented by numbers on a screen. This digital money is created out of thin air and circulated into the economy, often with little regard for actual backing or value. To simplify this, think of a credit card: it’s essentially digital paper money extended as credit. When you use a credit card, you’re borrowing money from the issuer, which must be repaid, usually with interest. The key takeaway here is that both paper money and digital credit are not scarce; they can be created in limitless amounts.

The Creation of Fiat Currency

Fiat currency, or paper-based money, is primarily created by a few key players, with the Federal Reserve at the center of the process. There are two main methods of fiat currency creation:

Borrowing from a lender through a loan secured by collateral.

Receiving credit from a lender without collateral.

When a loan is secured by collateral, the borrowed money is backed by an asset, such as a home or car. For example, in the case of a mortgage, the home itself serves as collateral. If the borrower defaults on the loan, the lender can seize the collateral to recover the loaned amount. In contrast, unsecured credit, such as credit cards, is extended without any collateral. While borrowers must repay both the principal and interest, the lender faces a financial loss if the borrower defaults. This is usually mitigated by lowering the borrower’s credit score, making it harder for them to secure future loans.

Paper Money as a Liability

From an accounting perspective, paper money is a liability—it signifies a financial obligation that must eventually be repaid. However, the crucial question remains: Who provides the loan? The answer lies with those who have the power to create money out of thin air—the lenders. A prime example is the relationship between the U.S. government and the Federal Reserve. As the central bank of the United States, the Federal Reserve has the exclusive authority to create U.S. dollars, which function as debt obligations. Historically, each dollar was once a “claim check” on gold, a form of sound money backed by a tangible asset.

The Perpetual Cycle of Debt

To better understand the inherent flaw in this system, let’s consider a thought experiment. Suppose that no dollars exist in the economy. Now imagine someone borrows $1 with the promise to repay $1 plus $1 in interest. Since there are no existing dollars, where does the second dollar come from? The only way to repay both the principal and interest is through more borrowing, which in turn creates more debt. This creates a perpetual cycle where more money is created, but more debt must also be generated to repay it.

This cycle is problematic because, as debt continues to increase, it always exceeds the money available to repay it. As a result, when borrowers default on their loans, lenders seize the collateral. Over time, this process leads to wealth consolidation at the top, while the majority of the population is left in systemic poverty.

A Ponzi Scheme in Disguise

At its core, the current monetary system operates much like a Ponzi scheme. While it may appear functional in the short term, its long-term consequences are disastrous. As more money is created, more debt follows, and the system becomes increasingly unstable. This design ensures that the rich continue to accumulate wealth, while the majority of people fall further into poverty. Financial servitude becomes normalized, rather than exceptional.

The Warning of Thomas Jefferson

Thomas Jefferson, one of the Founding Fathers of the United States, foresaw the dangers of private banks controlling the issue of currency. In a famous quote, he warned:

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.”

This warning highlights the risks of a system that is fundamentally flawed by design. The outcomes of such a system—hyperinflation, deflation, wealth consolidation, and systemic poverty—are not accidental. They are by design.

Conclusion

The current system of fiat currency is inherently unsustainable. It relies on an ever-expanding cycle of debt that benefits the few while impoverishing the many. It ensures that wealth continues to concentrate at the top, leaving those at the bottom in perpetual financial servitude. As Jefferson predicted, this system poses a great threat to the future prosperity and freedom of individuals. The question remains: will the system continue to function for as long as it has, or will the inevitable collapse of debt ultimately force a change in how we think about money? Only time will tell.