Debt trap
While most people use money every day and many put in great effort to earn it, despite the central role money plays in our lives, very little thought is given to what money actually is, how it is created, how its design affects our economy, or whether the monetary system can be improved.
Most economists define money by its function, which is usually divided into the following three basic functions:
- 1. A medium of exchange, used to pay for goods and services;
- 2. A unit of account, which helps us understand the relative value of different things;
- 3. A store of value, which gives people confidence that money will retain its value in the future.
In terms of its physical form, money has changed over time across different parts of the world and has included items such as tally sticks, clay tablets, livestock, and various forms of precious metals such as gold and silver.
Today, money takes the form of so-called fiat money – whose value is derived from government regulations and laws, rather than from any physical commodity. The modern monetary system is based on debt-backed money.
Figure 1: Illustration of money creation
Example. Figure 1 shows how the first money is created when taking a loan or credit. In the first loan, the client borrows 1,000 denars, which they must repay to the bank after one year with 5% interest, that is, 1,050 denars. In other words, this creates the first 1,000 denars. Then comes the second loan, then the third loan, making a total of 3,000 denars in the economy.
Figure 2: Illustration of non-existent interest
The problem lies in the following: the money needed to pay the interest on these loans does not exist in the economy — meaning someone else must go into debt in order for the interest to be paid.
This is one of the fundamental problems of the current system, which underlies many unwanted consequences in the economy and society — inflation, unequal distribution of wealth, environmental consequences, national debt, and other issues [4, 7, 8].
In Macedonia today, there are the following three forms of money:
- 1. Cash (banknotes and coins) is the simplest form of money — banknotes of 10, 50, 100, 200, 500, 1,000, and 2,000 denars, along with metal coins that most of us carry in our wallets at all times. Paper banknotes and coins are created under the authorization of the central bank (NBRM).
- 2. Central bank reserves are an electronic form of money created by the NBRM. Compared to cash, the public cannot access or use central bank reserves. Only commercial banks, savings institutions, and a few systemically important financial institutions with accounts at the central bank can use this form of money. Commercial banks use central bank reserves to settle payments with other banks at the end of each business day. Whenever payments are made between customers of different banks, they are ultimately settled through transfers of central bank money (reserves) between those banks' reserve accounts.
- 3. Deposits in commercial banks represent the balance in your bank account. In banking terminology, this is called a bank deposit. For example, when you buy something in a store using your debit card, you are doing so with bank deposits. In this case, your bank debits your current account by the value of the purchase and informs the store’s bank to credit the store’s account with the same amount. Technically, bank deposits are just numbers in a computer system; in accounting terms, they are the bank’s liability to you. The term is somewhat misleading, because a bank deposit is not like storing a valuable item in a safe. It is an electronic record of what the bank owes you. Although not widely recognized, the cash you deposit in a bank legally no longer belongs to you — it belongs to the bank. This third type of money, bank deposits, is not created by the NBRM, but by commercial banks such as Komercijalna Banka, Stopanska Banka, Uni Banka, and other commercial banks in Macedonia during the loan issuance process.
The circulation of denars in Macedonia operates under a two-tier monetary and economic system [1], which was implemented after the country's independence (previously it was a single-tier system), as shown in the image below.
- - Interbank circulation of (a relatively small amount of) central bank reserves, created by the NBRM and used by commercial banks to settle mutual payments.
- - Public circulation of (a much larger amount of) bank deposits, created by commercial banks during the lending process and used by the public for transactions.
The public circulation of the denar takes place through commercial banks, which are responsible for issuing loans — that is, creating new money (bank deposits) in the system. The interbank circulation of denars occurs at the central bank — NBRM — through the payment systems: MIPS (owned by NBRM) and KIBS (owned by commercial banks). The following chart shows the total money supply in denars (M2-denars) for the period from January 2003 to August 2024 [10].
Figure 3: Illustration of a two-layer monetary economic system
The next Figure 4 shows the total money supply in denars (M2-denars) for the period from January 2003 to August 2024 [10]. The data on the M2-denar money supply were taken from the website of the National Bank of the Republic of Macedonia [10].
Figure 4: Money supply M2-denars
Figure 5: Comparison of money supply M2-denars
In the period from January 2003 to August 2024 – Figure 5 – the amount of newly created digital money (bank deposits) (M2-denars) by commercial banks increased, making up 81% of the total money supply in denars. In August 2024, 81 percent of denars in the economy were created by commercial banks, and only 19 percent by the Central Bank — of which 6 percent were bank reserves (digital money) and 13 percent were cash (banknotes and coins).
Figure 6: Types of money in the public economy
Today, 86 percent of the money in the public economy is created by commercial banks, while only 14 percent is cash created by the National Bank of the Republic of Macedonia — Figure 6. Over the past 20 years, commercial banks have created an additional amount of around 5 billion euros (denars expressed in euros), and that number continues to grow. The amount of digital and physical money created by the Central Bank has also increased by about 1 billion euros over the same period.
Figure 7 below presents the capital ownership by country in Macedonian commercial banks (the listed data are taken from [9]).
Figure 7: Ownership of capital and reserves by country in commercial banks
In his works [2, 3], author Richard Werner provides a clear explanation of the process of money creation (loan issuance) by commercial banks, based on theoretical foundations and empirical evidence. According to empirical analysis, commercial banks individually create money out of nothing and charge interest on it. Additionally, as defined in the Quantity Theory of Credit: if credit (loans) is used for productive investments in goods and services, the lending is sustainable and does not cause inflation; if it is used for unproductive consumption or asset speculation (real estate or stock markets), it causes inflation.
Next, we will analyze inflation and its consequences.
Inflation
In this analysis, we will use the measure of monetary inflation as the indicator of inflation. Monetary inflation is the process of increasing the amount of money in the economy, which can lead to a decrease in the value of money and a rise in the general price level of goods and services. This phenomenon most often occurs when the responsible monetary authority prints or issues new money without corresponding economic growth to absorb the new money supply. Based on the previous charts, it can be concluded that, in general, the creators of new money — commercial banks (with 86%) and the NBRM (with 14%) — are responsible for inflation in Macedonia.
Figure 8: Consumer basket (November 2004 – April 2024)
According to the image, with the total amount of denars tripling between November 2004 and November 2014, the consumer basket also increased by about three times — from 9,886 denars to 32,168 denars. In the period from November 2014 to April 2024, the amount of denars doubled, and the consumer basket also approximately doubled — from 32,168 denars to 60,212 denars.
Inflation causes a transfer of wealth (value) from the middle and poor classes to the wealthy segment of society. In other words, wealthy individuals do not hold money; instead, they store their wealth in assets such as property, gold, and other forms of capital. Meanwhile, the middle and lower classes tend to save in fiat currency (denars or euros), which causes them to lose value over time, effectively eroding their savings and wealth. Inflation also widens the gap between social classes and acts as a mechanism for impoverishing the population.
Seigniorage
Seigniorage comes from the Old French word “seigneuriage,” meaning “the lord’s right to mint money,” and represents the difference between the value of money and the costs of its production and distribution (profit from creating money). In today’s economy, seigniorage from different types of money can be defined as follows:
- -Seigniorage derived from metal coins represents the value of the coin in denars in the economy minus the cost of the material and production of the coin in the mint.
- -Seigniorage derived from banknotes is more indirect; it is the difference between the interest earned on securities obtained in exchange for banknotes and the costs of printing and distributing the banknotes.
- -Seigniorage of commercial banks implies additional costs that the bank would have to bear if, instead of having the ability to create money at almost no cost, it first had to borrow money and then lend it to the market.
Seigniorage can represent a source of income for a government. This allows the government to increase its purchasing power at the expense of the public’s purchasing power — metaphorically speaking, an inflation tax on the public. Nowadays, seigniorage for the government and the state is reduced because most of the money in circulation is created by private commercial companies — commercial banks. According to a study [1] in the United Kingdom, banks’ profits from seigniorage amount to about 73% of total banking profits annually. In the UK, bank deposits make up 97% of the total money supply, while cash accounts for 3%. In the study, central bank reserves were excluded from the calculation due to their small amount.
If we apply the same formula to calculate seigniorage for commercial banks in Macedonia, the profit from seigniorage (hidden subsidies) amounts to about 515 million euros over a 15-year period.
| Year | Seigniorage (Denars) | Seigniorage (Euros) |
|---|---|---|
| 2011 | 780 | 13 |
| 2012 | 604 | 10 |
| 2013 | 161 | 3 |
| 2014 | 322 | 5 |
| 2015 | 700 | 11 |
| 2016 | 958 | 16 |
| 2017 | 967 | 16 |
| 2018 | 1162 | 19 |
| 2019 | 1312 | 21 |
| 2020 | 1447 | 24 |
| 2021 | 1563 | 25 |
| 2022 | 2324 | 38 |
| 2023 | 5583 | 91 |
| 2024 | 6732 | 109 |
| 2025 | 7047 | 115 |
| Total: | 31661 | 515 |