Take a bill of currency we use in the United States out of your wallet and look closely at it.

It says dollar or dollars on it, but under the historical definitions of a dollar, what you are holding is not really a dollar in the traditional sense.

It is also not what this course defines as money. It is a bill of credit used as currency.

The currency in your hand is also not issued as a United States Treasury Note.

If it were a Treasury Note, those words would appear somewhere on the bill. Instead, look at the words printed across the top:

Those words identify the issuer. Federal Reserve Notes are issued through the Federal Reserve System rather than directly as Treasury Notes.

The regional Federal Reserve Banks are privately structured institutions whose member banks hold stock. Congress granted the Federal Reserve System its sole monopoly in issuing the nation's paper currency.

Our current monetary system is a debt-based monetary system.

In simple terms, debt is deeply connected to our currency, and our currency is deeply connected to debt.

Dollars enter the system through lending and credit creation. Commercial banks create new deposit currency when they issue loans, while central-bank operations also operate through credit and debt instruments.

In that sense, we routinely pay our bills using currency that entered circulation alongside debt.

If all bank loans were repaid, the deposit currency created by those loans would be extinguished along with them.

These loans must also be paid back with interest.

When the loan is created, the principal is created as new deposit currency. The additional interest owed on the loan is not created as part of that same loan.

This means borrowers must obtain the currency needed to pay interest from money already circulating in the economy, from income, or through additional borrowing.

As new debt is created, it produces new principal and creates new interest obligations of its own.

This can create a near-continuous cycle in which increasing amounts of debt are needed to sustain an economy built around credit.

The cycle cannot expand without limit. At some point, debt growth can become difficult to sustain, which can lead to defaults, contraction, or a broader financial crisis.

Most people believe money is created by governments printing physical cash. In reality, modern currency is created through debt.

When banks issue loans, they effectively create new currency into existence. Every mortgage, business loan, credit card balance, and government bond expands the money supply through additional debt obligations.

In this system, new money enters the economy primarily when someone borrows.

This creates a fundamental problem:

If borrowing slows significantly:

As a result, governments and central banks are often incentivized to encourage:

This creates a cycle where the economy becomes dependent upon ever-increasing debt simply to maintain stability.