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The credit-based debt economy, and how Bitcoin differs
10 min read
How credit creates money
The Bank of England explains that in the modern economy most money takes the form of bank deposits, and that commercial banks create those deposits when they make new loans (Bank of England, 2014). Fractional-reserve banking is often taught as banks lending out existing deposits; the Bank's paper describes lending as the act that creates the deposit.
The same paper stresses limits: competition, regulation, borrowers' demand and, above all, the central bank's interest-rate policy constrain how much money banks create.
Fiat money since 1971
On August 15, 1971 President Nixon suspended the dollar's convertibility into gold, ending the Bretton Woods link (Federal Reserve History). Since then the dollar has been a pure fiat currency.
Debt and money today (US data, dated)
| Measure | Value | As of | Source |
|---|---|---|---|
| Total public debt outstanding | $40.34 trillion | Oct 13, 2026 | Treasury: Debt to the Penny |
| Household & nonprofit debt (securities and loans) | $21.38 trillion | Q2 2026 | FRED: CMDEBT |
| M2 money stock | $23.34 trillion | Aug 2026 | FRED: M2SL |
| Consumer Price Index (1982–84 = 100) | 336.298 | Sep 2026 | FRED: CPIAUCSL |
Global credit to governments, households and companies is tracked by the BIS total credit statistics.
What inflation does to savers
A CPI index of about 336 means the same basket of goods costs roughly 3.4 times its 1982–84 average (FRED). Cash savings earning less than inflation lose purchasing power, which pushes savers toward riskier assets.
How Bitcoin differs
- Fixed supply: Bitcoin Core enforces a maximum of 21 million BTC (MAX_MONEY), and issuance halves roughly every four years (history).
- No issuer and no lender of last resort: no institution can create more bitcoin or bail out holders.
- Cannot be created through credit: lending bitcoin moves existing coins; it does not create new ones on the base layer.
- Bearer asset: with self-custody, whoever holds the keys holds the asset, with no intermediary.
Counterarguments, fairly stated
- Many economists see an elastic money supply and a lender of last resort as tools that soften crises; a fixed supply cannot respond to demand shocks.
- Debt also finances productive investment, and moderate inflation is a deliberate policy target, not necessarily a failure.
- Bitcoin's price is highly volatile, which limits its use as a unit of account today.
- Off-chain bitcoin (exchange balances, IOUs) can still be lent and rehypothecated, so its benefits mainly apply when you hold your own keys.
Educational content only, not financial advice. See our disclosure.