ften we are told of the wonderful power of compound interest (earning interest on both principal and previous interest). We are told how compound interest can make a modest investment grow into a great amount. For example: If you invested $10,000 at 7% compound interest for 30 years; you'd expect your investment to grow to $76,122.52. Sounds Great! Compound Interest must truly make money grow.

Let's step out of the dream world of bankers' hype. Just how does money grow? Where does the interest money come from? When you put money into an interest-bearing account, does it turn into something like rabbits that mate and quickly reproduce? What happens? The increase of money in your account had to come from someplace. To understand financial planning, economics, growing public and private debts, increasing taxes and prices, etc. we must always remember what it is we use for money, how all New money is created and put into circulation.

When the economy grows and more money is needed, always remember that, the actual creation of money always involves the extension of credit by private commercial banks. If someone does not borrow it - the money cannot exist. If you invest $10,000 and 30 years later get $76,122.52, somewhere, some other individual, corporation or government had to borrow $66,122,52 before it could get into your account. Now, you have the money. They have the debt. The debt can never be paid because the interest is never created when the money is borrowed. Because it cannot be paid, the debt must constantly grow.

It's at this point that bank agents love to explain that the interest money comes from increased production. Stop here - and think! When was the last time your personal production (goods and services) turned into money? Have you ever waved a magic wand over a shoe, shirt, bushel of corn or hour of labor etc. and seen it turn into money?

There are only two ways to get money from what we produce:

1. We can create new money by using our produce as collateral for a bank loan which creates the new money.
2. Sell our production to someone in exchange for money that was also created as a loan to someone.

You can create money by using a credit card by signing the forms sent to you by the credit card company and promising to pay the credit (money) back in the future with interest. The bank turns that promise to pay into collateral to create the money as a loan the minute you use your credit card to buy something.

Let me explain another way. Imagine that we have $10,000 total money in circulation. We invest all of it in a compound interest-bearing account. Let's say that the money is invested in a shoe factory. The factory spends the $10,000 for raw resources and labor to produce shoes. It sells the shoes and gathers back the total money supply and returns it to the investor. Remember, if the total money supply is only $10,000, that is all the shoe factory could return to the investor.

If the factory is going to return the original $10,000 investment PLUS the compound interest, the money supply would have to be increased by at least $66,122.52 or even more if the shoe factory is going to have a profit. To increase the money supply under the present system, it has to be borrowed by someone from a bank. By borrowing the $66,122.52 needed to pay the investor 7% compound interest, the total debt drawing interest at some bank would be $76,122.52. It's easy to understand how we have $26 trillion of debt drawing interest at the end of 1990.

These facts are not clearly visible because there are vast numbers of loans being made and extinguished on a daily basis. Banks spend a large part of the interest back into circulation. However, this interest-spending does not increase the money supply. It simply keeps money in circulation. In addition, the total amount of interest and debts that are not repaid are repudiated through business losses, repossessions and bankruptcies.