By guest author Paul Grignon, creator of the Money as Debt Trilogy viewed by tens of millions worldwide in 24 languages, and used by Advanced Placement Economics teachers to communicate how what we use for money is created as debt (my AP Econ assignment using Paul’s movie). Paul is an independent researcher, writer, visual artist, and movie creator.

Money created as a debt-of-itself is an elusive concept.  Put simply, most of our money is bank credit, mere numbers on a computer created by a borrower promising to pay the same numbers back to a bank, on a schedule. Logically, in order for it all to be paid back, it has to all remain available to be earned by the borrowers that created it.

But the banking system offers the most return on our money if we place our money into term deposits, making it unavailable to the borrowers that created it.  Because the amount in savings is a deferred demand for legal tender, the bank is free to create new bank credit, i.e. current liabilities for legal tender on demand, in its place.  In effect, money created as debt has been re-lent as if it were loanable funds, resulting in two simultaneous principal debts of the same money.

And it doesn’t stop there. Over the considerable lifetime of a mortgage, any of this money can be spent, earned, deposited and replaced with new debt any number of times.

M2 (cash, checking and savings) in the USA is normally about 4 times M1 (cash and checking). This means that 3/4 of all the money created as debt-to-banks-on-a-schedule and on which borrowers are making principal and interest payments is locked away in savings, perpetually unavailable to the borrowers that created it.

Moreover, how can M2 be 4 times M1? Money created as the current liability of a bank is always M1 to begin with and becomes part of M2 when lent back to the banking system as a term deposit.  Assuming term deposits are replaced with new M1 debt-money, where did it all go?  It must have gone back into term deposits and been replaced again.

My conclusion is that for M2 to be 4 times M1, every dollar of existing M1 must have been, on average, deposited and replaced 3 times over.  Or, to put it another way, every dollar in actual circulation is simultaneously owed to 4 lenders, the bank that created it and 3 savers.

We, as a society, borrow from Peter to pay Paul and vice-versa, caught in an invisible mathematical trap of perpetual debt that has no escape except default. Past principal debt can only be paid with newly created principal, leaving the newer loan dependent on the next loan for available means of payment.

Therefore, whenever the supply of new bank credit slows down, for any reason, it causes mathematically inevitable defaults.  People lose their homes and businesses.  Mass default and economic collapse can only be avoided by a constantly increasing flow of new bank credit.  

The good news is that it is possible to unwind this fragile situation constructively and without disruption. However, to do so, it is necessary to think outside of the box.  It is necessary to convert bank savings into a different form, credits payable in goods and services only.  Fortunately, this form of exchange and wealth storage medium already exists and is estimated to account for at least 20% of business-to-business world trade at the present time.

Credits for products and services from specific suppliers would be secured savings backed by the full productivity of private enterprise, rather than unsecured bank savings subject to bail-in confiscation by a house-of-cards banking system. This straightforward change in the system would remedy the current system’s inherently unstable math, and would be highly advantageous to savers, businesses, the banking system and for rebuilding our economies.  It would also free us from the growth imperative that is driving the planet to ecocide.

The full proofs of this analysis and a very detailed proposal for this path out of our current monetary dilemmas is to be found at

My paper on this subject published by the World Economics Association.