The last Hamill Economic Update left a number of people scratching their heads, wondering how the money supply could be expanded through the following example:

“Let me give an example.  Your friend has two $5 bills.  You have nothing.  What is the total money supply between you and your friend?  The answer is $10.

Your friend loans you their $10 at no interest, with you verbally promising to pay them back at some point.  What is the value of the money supply now?  Is it $10?  No, it’s $20.  You have $10 that your friend lent to you.  Your friend has a $10 loan that is secured with your verbal promise to pay them back.

Now you decide to return a $5 bill back to your friend as partial principal repayment.  What is the value of the money supply?  It is $15.  You have $5 remaining from the original loan.  Your friend has a $5 loan balance secured by your verbal commitment to repay, plus a $5 dollar bill.

Do you see how the money supply was reduced from $20 to $15 by you repaying principal on your loan?  All principal payments on all “credit outstanding” in our nation reduce the overall money supply by the amount of the principal paid.”

Let me see if I can help to clarify things a little bit more.  It takes a little bit of thinking “outside the box” in order to have the light bulb click on.

A debt-based economy is one where debt is created first.  Debt can be thought of as “a promise to perform future labor in return for a commodity received today”.  That commodity can be anything.  Think of it as the “Wimpy” economy for those of you who have watched Popeye cartoons.  Wimpy will gladly pay for the hamburger he eats today with labor that he performs tomorrow.

“Money” is simply a “claim” on debt – a “claim” on the promise of the future labor of others.  If you have a claim on the future labor of others then you have money, no matter what form it is in.  It could be a $10 bill.  It could be verbal – “his word is his bond” (promise of future labor).  It could be electronic entries on a computer.

My example used a case where somebody had $10 – consisting of two $5 dollar bills.  This $10 was in the form of Federal Reserve Notes, which are claims on the future labor of those under the civil authority of the US government.



When you receive the $10 loan from your friend then you are the new owner of those claims on future labor.  However, you also verbally promised your friend that you would pay them back.  You extended the promise of your future labor to them and they claimed it.  Therefore, you hold $10 of claims on future labor and your friend holds $10 of claims on your future labor.  The money supply in our scenario is now $20.



It does not matter whatsoever that your friend cannot go buy a hamburger with your verbal commitment of repayment.  It is still money.  A person could not take a five-year Certificate of Deposit and buy a hamburger either, but nobody would debate that it’s not money.

What happens when you hand a $5 bill back to your friend as a partial repayment of principal?  What does that $5 bill represent?  It represents a claim on the future labor of those under US civil government authority.  You can take these claims you own and use them in place of $5 worth of your future labor that you owe to your friend. 

You now only have $5 left of claims on future labor.

Your friend had claims on $10 worth of your future labor.  Now they only have claims on $5 of your future labor since you “completed” $5 worth of labor by substituting claims on future labor that you owned.  ALL “completed” labor in a debt-based money supply represents money that disappears.  It no longer exists.  It vaporizes.  You cannot have money (claims on future labor) without having the debt behind it (promise of future labor).  It’s mathematically impossible.

Your friend also holds the $5 bill that you gave back to them.  It still represents claims on the future labor of those under US civil government authority.

You have a $5 bill.  Your friend has a $5 bill plus the remaining claims on $5 worth of your future labor.  The total money supply is $15.



If you hand over the remaining $5 bill to your friend then your friend will no longer have any claims on your future labor.  Instead, they will hold two $5 bills.  The total money supply will then be back to the original $10.

Conclusion

One cannot hope to comprehend economic principles in a debt-based economy without first understanding that all money is simply a claim on the future labor of others.

The paycheck that one receives is a shift of existing money.  It does not increase or decrease the money supply, unless the employer takes out a loan or uses other forms of credit to meet payroll.  Your labor is paid by giving you claims of the future labor of others.  You become master over a certain number of debt slaves for a certain period of time.

Your comments and questions are welcome…

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