There are many descriptions of how the money supply increases. There are even more theories on why the money supply increases. By money supply we mean all the money tokens in the monetary system. The following describes how the money supply increases and outlines a method of increasing the money supply to meet the money needs for investment and trading.
Money is a token of a promise. The promise is that the money token can be exchanged for something of value.
If we have money tokens – bank accounts with deposits – then we can lend those tokens to others and in return we expect to get back more tokens than we lend. If we do not get back more tokens then we require the borrower to sell an assets they have mortgaged and to use that money to repay the loan. This is called monetizing assets.
Banks are allowed to create new money tokens if they can find a borrower who has an asset they can monetize.
If we lend exactly the same amount of money as is repaid then the money supply will stay the same and we will not increase the amount of money tokens in the system. If there are more loans made than repayments then the number of money tokens will increase.
As we only make loans by monetizing assets then we would expect that the total amount of loans in an economy could not be greater than the total amount of assets because banks can only make loans by monetizing assets.
However, the way our system works we make a lot more loans than we have assets. This comes about because we can monetize the same assets more than once. This happens because we can make a loan that monetizes a loan. This means there is an infinite amount of money that can be created.
We can stop this spiral of debt by making sure we have enough money tokens in the system to monetize all the assets that are in existence. We can do this, without changing the existing system, by increasing the number of money tokens in a way that ensures we will create an asset at the same time as increasing the number of money tokens.
We do this by creating interest free loans that must be used to create a new asset. If we have enough money tokens in the system then there will little profit in creating new money tokens by monetizing loans.