Whenever debt is itself money, this money becomes a self-inflating debt principal by already being its own interest. Hence modern inflation, deflation, and eventual monetary crises. Yet why does money become debt? The concept of representational monetary identity answers to precisely this question. Such an answer depends on:

  • A new theory of commodity exchange

  • A new concept of money

  • A new theory of exchange value

  • A new concept of monetary value

  • A new theory of monetary representation

The underlying investigation begins by analyzing the process of banks loaning a fraction from their clients’ account balances to other clients than its original depositors while keeping the remainder as reserves—fractional-reserve banking.

Fractional-Reserve Banking

For example, once a commercial bank receives a new deposit of $10,000.00, 10% of this new deposit becomes the bank’s reserves for loaning up to $9,000.00 (the 90% in excess of reserves), with interest yet without withdrawing the loaned money from the source account. Likewise, if that maximum loan of $9,000.00 does occur and the borrower deposits it into another account, whether in the same bank or not, then again 10% of it becomes the latter bank’s reserves for loaning now up to $8,100.00 (the 90% now in excess reserves). As always, the bank charges interest on the loaned money despite not withdrawing it from the source account. This process could proceed indefinitely, adding $90,000.00 to the money supply, valuable only as their borrowers’ resulting debt: after countless loans of recursive 90% fractions from the original deposit of $10,000.00, that same deposit would have eventually become the 10% reserves for itself as a total of $100,000.00.

Yet how can credit alone create new money? How can a debt retroactively create its owed money? Something else must be happening here, in addition to mere loans. What is it? What else happens in the whole process of commercial banking? First, there is a deposit. Then, there is a loan of up to a fraction (of 90%) of this deposit, at interest yet which the bank never withdraws from the source account. Finally, the borrower can credit that loan to another account, in the same or any other bank. Suddenly, the trillion-dollar question emerges: are these two accounts sharing the same value?

  • Regarding deposit money the answer is yes: the loan can still belong to the balance of the source account, consequently being that same deposit money.
  • Regarding account balances the answer is no: the loan can also belong to the balance of the target account, consequently being additional deposit money.

However, if the partial balances of both accounts must represent the same deposit money, then how can they duplicate it?

Representational Monetary Identity

If we conceptually distinguish money from its representation, then we can clearly see what is happening in that ambiguous loaning from bank deposits: commercial banks are mistaking bank accounts for the money they represent. This way, when they deposit a loan from any account into any other, they must mistake the same loan for both accounts, hence duplicating its money, rather than subtracting it from the source account. That confusion between monetary identity (deposit money) and its representation (bank accounts) is thus what alone replicates loaned money: two deposits in different accounts must always be different money, even if one is just a loan of money from the other.

The same confusion affects a variety of monetary representations, like paper notes and metal coins. Even when sheer gold represents money, there is no inherent distinction between monetary identity and its representation. Any such inherent indistinction (confusion) is precisely what I call representational monetary identity.