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  • Writer's pictureNeal Tanner

Government Debt - where did all the money go?

I'll try to answer this question as simply as possible so anyone new to the topic may also understand.

The answer to this question lies in the understanding how money is created today in the world. In other words, understanding the monetary system. I will oversimplify so if I miss a few details or if I make some mistake please mention in the comments.

Prior to 1971, all the currencies in the world were backed by gold. That means the amount of money (currency notes) in circulation was proportionate to the amount of gold held by their central bank. The currency was exchangeable in gold and silver too. That meant that you could walk up to a bank with your $ and walk out with a fixed amount of gold/silver every time. Other currencies were pegged to the US dollar via fixed exchange. This type of monetary system is known as the gold standard.

In 1971, President Nixon took the US off the gold standard, that meant that US dollars were not exchangable for gold in a fixed price and the exchange value of gold to dollars would be set via a market as it is done today. This made the US dollar and the other currencies in the world fiat aka not backed by anything. A fiat currency is backed by nothing but faith.

This also changed how new money is issued in the economy. On the gold standard, the more gold you mined, the more currency you could issue. Nowdays, money is issued as debt. For example if the US government wanted to increase the money supply they would create an IOU of X dollars. The IOU would be bought by the Fed with new cash (printed or digital). The Fed has the IOU and the government has the money which they spend. This vicious cycle keeps the debt growing. The problem also is that technically, all the debt can never be paid back as we owe all the money + interest.

So, every country in the world who can print their currency keeps issuing debt to pay off the old debt and other reasons. That is why the whole world is in debt. The money did not go anywhere, the debt is the money.

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