If you borrow the very first dollar into existence, but promise to pay it back with another dollars worth of interest, where do you get the second dollar? How do you pay it off?

By making more debt from another party.
The entirety of today’s economy is based on creating more and more debt.
Because of interest, you have to create more debt, there is no way around it, and this cumulative debt grows and grows, until the entire house of cards invariably collapses.

By producing wealth. Your create wealth by making or doing something. You take the first dollar and use it to buy materials to make something of value that you sell for $3. Then you repay the loan and you have a dollar.

In the afternoon you use the dollar to do it again. After that you take $2 and reinvest it, and take the third dollar as profit.

100% interest is pretty steep….

@zenvelo
Where do your customers get those 3 “dollars” from? They, after all, do not exist, and that dollar you borrowed is now in the hands of the guy you bought the resources from.

Who says they don’t exist? A dollar is a store of value. A first dollar means nothing unless there are other dollars. Just because the original was the first made doesn’t make it the last.

If that is the only dollar, there is no such thing as interest.

Dollars are a metaphor for value. They reflect the value of everything that people value, except in reality, they just reflect the value of goods and services.

Dollars don’t get borrowed into existence. They don’t get printed into existence. They already exist as long as people value things or stuff that people do.

What we need is a way of agreeing that the amount of dollars we (collectively) print is equal to all the goods and services we produce or have. So, to some degree, that is an arbitrary amount, at first. We have all this stuff. Let the public bank print 100 dollars and that will be worth all the goods and services we have in the US. Ok. Let’s call it 100 billion dollars.

Now, we put all this money in circulation. Now we have a way for people to trade the stuff they have and the stuff they do with other people without having to barter, which is very illiquid and slow.

It all works fine as long as we all agree that the amount of dollars in the system equals the amount of goods and services. But if people cheat, mistrust enters, and we’re in trouble.

So lets say the banks encourage people to borrow more than a house is worth. They are pumping more money into the system but not increasing the value of goods and services. People go to sell their house, and no one will buy at that price. Suddenly, there is too much money for the amount of stuff, and money has to deflate in value. Bad for the economy. People stop buying things, and companies lay people off, and we have recession.

I may not have gotten the direction of the inflation or deflation correct here, but the idea that money and stuff are out of balance is what causes the lack of trust in the system and what causes the problems we have.

Anyway, people are out of work. Factories are idle. There is still a lot of stuff and capacity, but no one believes it is balances, and so without confidence, the economy slows. We need to rebuild trust. We need to regulate the banks so they can’t play games with the money. They can’t give loans where houses aren’t worth the money being loaned.

Once people are confident that dollars equals stuff, they will invest and work and build again. We’ll make more stuff and do more work, and we’ll need more dollars in the system to stand for all that stuff.

Dollars are nothing. Even if we had the gold standard, gold would be nothing. Money, whether you use shells or diamonds, is only worth something when people believe it is an accurate reflection of all the stuff in the economy. There is a one to one relationship between money and stuff. All the stuff equals all the money, no matter how much money there is or what we use for money. Money is just a technology; an agreement; that allows us to trade more efficiently. Money, on it’s own, is nothing. Worthless.

So first dollar borrowing is not really a relevant scenario.

We lend money because we believe people will make enough stuff to be worth that money. It is a conceit, if you will, that allows us to give people a way to trade for things they haven’t yet made, but plan to make. It is a gesture of trust. Once people make stuff, they can sell it. The value is there, and they keep some for their own account, and use some to pay back those who trusted them in the first place.

Banks are traditionally the ones who establish the credibility and credit-worthiness of people who state an interest in creating stuff. We trust banks, traditionally, because they are known to be sober and careful. But if we don’t watch them, they will start taking wild stupid risks, and then they aren’t the right group to entrust the process of equating money and stuff in the world to.

People usually make the mistake of thinking that money is something real. It isn’t. It is a metaphor. But if you can’t get past this idea that money is purely an idea, you’ll want gold or something to make you feel secure. It won’t work, because it is a misunderstanding of what money is, but for a moment, you might feel secure, because you can hold onto gold.

Money is nothing. It is an idea. What is real is what we make and what we do. Money is a fiction we create to enable us to trade the products of our labor. Money only works if we believe there is an accurate relationship between it and stuff. Banks manage that relationship. They do the lending. They make sure people pay back. As long as we keep the banks under control, we can maintain trust and stability, and your dollars can be loaned out and repaid.

I don’t if this will help clear things up a bit. This isn’t my question, but one that was asked to an audience at a convention. I took it as more of a concept or idea rather than literal, however not sure which way it was intended. I just wanted to see what people here thought, since no one in the audience said anything to it.

@zenvelo
It is the first dollar. Meaning it is the only one at that time, which means your customers do not have 3 dollars. Where do they get the 3 dollars from? They either have to borrow them, creating debt and interest (virtual money that does not exist physically) through interest, or earn it. But that only pushes it further back. Where does their employer get these 3 dollars from?
Somewhere down the line it had to be borrowed from someone that does create money out of nothing and then lends it to someone else with the demand to be paid back with interest later. By “creating wealth” all you do is create the necessity for more currency to be printed, and by extension more lending with interest, more debt, which in the end will inevitably create more debt by necessitating more money printing.

@wundayatta “It all works fine as long as we all agree that the amount of dollars in the system equals the amount of goods and services. But if people cheat, mistrust enters, and we’re in trouble.”

That is the biggest issue seems to be in our current situations. You say “we”, but its really just a group of people….Who I really don’t even know who they are OR why exactly they determine these kind of things.

I will likely find out on the news or elsewhere, shake my head and continue on my usual day. What good is this? How do you fix it?

@ragingloli That’s not how money works. Prior to money, an economy is barter. Barter is very inefficient , because the goods usually are not traded smoothly from the person who has it and the person who wants it. Money is something that a society agrees will store value.

So society decides to use dollars to store value.

Wealth is created by making a good or doing a service that is of value to another.

And @wundayatta is inaccurate in saying the amount of money must be equal to the amount of goods and services. That would mean no savings or investment.

@CuriousLoner, your question interests me in the respect that I’m curious why you asked. Would you mind explaining the type of convention that you attended where this question was asked?

@CuriousLoner Well world domination of course. How else can I capitalize on the world if I don’t understand how it works?

I’m joking. :) I am particularly interested in just knowing how it works and further more how to fix it. It wasn’t really a convention I guess. A small group of folks meeting for a philosophic group in which economics was brought up.

creation of wealth =/= creation of money.

when more wealth is created than money, the value of the money goes up (deflation).
conversely, when more money is created than wealth, the value of money declines (inflation).

WRT the opening Q, if we assume that the fractional reserve system is in place, here is an example:
You will borrow the first dollar, then buy some wood.
The bloke who sold you the wood puts his money in the bank.
Then you will fashion the wood into a chair.
Someone else (maybe even the lumberjack) will borrow money from the bank (if the bank holds a 10% reserve: up to $9) to pay for your product.
you then have more money, to pay back the original dollar + interest. And hopefully some left over.
There is also more money in existence…and more value.
This is how the banking system’s creation of money helps the economy to grow.

Obviously, before this system existed there was already currency, which already stored wealth, so the system didnt begin with something so absurd as borrowing the first dollar into existence… but yeah, now money is created by debt and represents debt. Very cleverly, money has been turned inside-out, into something much more dynamic than gold coins.

Although it seems perverse, there is nothing really “wrong” with this… i mean it works inasmuch as the market-capitalist system as a whole works…. its very effective in helping the economy to grow.

The only dilemma we have (within this system) is that… it puts banks in a very powerful and profitable position, and when we give banks more freedom WRT this process, the economy has a much bigger potential for growth, but at the same time there is a much larger potential for abuse and negligence. This can be seen in how badly the banks have behaved in deregulated financial systems like those of the US and UK.

of course, the real problem is that the entire financial-monetary-economic-(political?) system is based on the idea of infinite growth, and our population is nearing (or beyond) the carrying-capacity of the planet.

If we had a coherent, conscious, collective will as humanity, population would be gently managed down to a sustainable level, and it would become possible to equalize living standards across the world.

The reality is that global society is based on divisions, competition, exploitation and growth. This is understandable, its biologically unremarkable.

“population overshoot” and “population die-off” are very clinical ways to describe our disappointing collective idiocy and inaction leading to the misery and deaths of billions of human souls, but really its no different to the behaviours and patterns of the other organisms on Earth.

Humans think they’re so smart because they use such ingenious methods to perpetrate their crimes of ignorance and selfishness.

@zenvelo
It is not as simple as that.
When you create a product, the cumulative value of products and services in the economy is now bigger than the supply of money, and given that your prices do not change, there is not enough money in circulation to pay for that additional amount of products, which means someone down the line has to borrow money (debt) to equalise and match the amount of money in circulation to the increased cumulative value of goods and services. The additional money does not just materialise in someone’s pocket.
And here is where it gets evil: because the borrower has to pay interest, he has to produce more value in either goods or services than he actually borrowed. That is where today’s economy’s mantra of “growth” comes from. The economy must grow every year. It must produce more value every year than the year before. Why? Because they must pay the interest. And because the overall amount of products increases every year, more money has to be borrowed every year, and more interest has to be paid, which feeds back into the requirement of more growth. It is a devil’s cycle that will inevitably end in a collapse.

If you know german, this explains it rather well.

Money, in whatever currency you want, is a placeholder for work. You need only supply an equal amount of labor to repay the dollar.

@Nullo
No. You need to supply more than that, 2$. You need to pay the 100% (1$ interest at a 1$ loan = 100% interest rate) interest, too.
And your customer will have to borrow 2$, and create 4$ of work to pay back his loan plus interest. And your customer’s customer must borrow 4$ and create 8$ of value. And so on.
And that is just to pay back the loan plus interest. He will need to produce more to have food and shelter.

@zenvelo I don’t say the amount of money must equal the amount of goods and services because I want it to be so, or there’s some rule here. I say it because that is how it works. The relationship between the money supply and goods and services determines whether we have inflation or deflation. Typically, we want there to be a little bit more money than stuff, because that leads to inflation, and inflation encourages people to do things with their money, instead of just sitting on it, or worse, waiting for it to grow more valuable, which is what happens when we have deflation.

So you are correct that the relationship between money and stuff is not precisely one to one. It should be just a little bit more money than stuff. But as an approximation, it is one to one.

The reason why people save and invest is so that they can get a return on their value. They can lend their value to others, and get a bit of a return. That gives others a bit of capital to play with, which is really just trust from other people. Often banks, but there are many other places to get trust from.

@CuriousLoner I say that we are in trouble when we don’t trust the value of money because the economy goes into recession and we lose our jobs and we can’t afford to buy stuff. There is no they who determine whether the system is trustworthy. That is something that happens collectively.

However, there is a they who can manipulate trust or upset it. When a large company commits fraud, trust gets upset for all of us. Enron did it. The mortgage consolidators did it. Bernie Madoff did it. The Republicans are responsible for a lot of it, because they are the ones who decided the banks don’t need to be watched. They think there is too much regulation, but it was too little regulation that sent us into this most recent recession, and if we elect Romney, the regulations will be loosened again, and someone will take advantage, and rip off a lot of people, and the trust in the system will die, and we’ll be back in recession.

When we are speaking of basic principles, it is important to understand that what makes the economy run is trust. Money is just a way of trying to make trust concrete. It does a decent job, but there is more to it that money can’t take care of. It gets intangible. It has to do with how much information there is in the system, and how efficiently it flows.

People need to know a lot in order to trust a business. Yet businesses can make more money if they have information that no one else has. This gives them an advantage, but it is always a temporary advantage and it always comes at a huge cost. They make lots of money until people catch on. Once people catch on, they stop using the business and they also stop trusting anyone else in the same business. The business dies, although the people who made the money have taken their profits elsewhere by then, if they are smart. The rest of us suffer as the business crashes.

It’s pretty metaphysical stuff, and yet people insist money is real. It isn’t. Trust is real, but that’s really hard to measure. And, ironically, people don’t trust it. Because they can’t see it, and they don’t know how it gets spread around. It explodes most people’s heads who try to understand.

But if you insist on making it concrete, you’ll be at a disadvantage at understanding how it really works. You’ll want real money and real gold, and will never realize that the concrete is ephemeral, in this case. It is the ephemeral which is actually concrete.

@ragingloli I was, of course, referring to the dollar in interest.

I think that this video should sum it up for you pretty well