Fiat Money: The Perfect Scam

Most countries have central banking - usually (especially in the case of the Bank of England, The US Federal Reserve and the Reserve Bank of Australia) non-government entities that have been given power via legislation to determine the monetary policy of the country. They do this by controlling how much money is in circulation through open market operations (buying and selling currency on the open market). This allows them to determine interest rates and the cash rate which in turn influences inflation, productive output and unemployment.

Another function is that they loan out money to the federal government at interest and this becomes government debt. This is done by the Treasury printing up a number of bonds and these are sold on the open market (mostly to banks as they carry low interest rates). The sale of these bonds transfers to money in the Treasury accounts where it is then used to pay for government programs. The Central Banks then buy these bonds from the bank, using money it created from nothing, and that is how money is created (Martenson 2009). Commercial banks then "loan" out this money at many times what they actually have in their deposits (if there is a deposit requirement), and many of those dollars end up in other banks where it is again loaned out many times, multiplying the amount of debt money in the economy.

(The above was taken from an essay I wrote for a state-funded university and can be seen in its entirety here)