There was once an island, called “Us”. Which was also the name of the people who lived there. Now these people, they had no money. So one day, the village elder said he would create it, and he would call it “dollar”. But the people were concerned. “Sam,” they said (for that was the man’s name) “you can’t just create money out of nothing!”
So Sam thought about it, and said, “You’re right. So instead, I will borrow it.”
“Borrow it?” The people asked. “What does that mean?”
“Here, I’ll show you.”
And Sam took from his pocket a piece of paper and wrote “IOU $1” and handed it to his nephew, Fred. Fred then wrote “$1” on another piece of paper and handed it to Sam. “See,” said Sam, “now I have $1. But I didn’t create it, I borrowed it.”
The people gathered around, and examined it closely, to make sure it was legit. Sure enough, it had a picture of a dead leader on it and everything. “And look” said Fred, “my dollar is good. It’s backed by a promissory note from Sam. And everybody knows he’s good for it.”
And so Sam borrowed a few more dollars from Fred, and paid for them with promissory notes, and used them to hire people to build houses, so the villagers could live indoors. Meanwhile, the dollars began to circulate among the villagers. They used them for all kinds of things. They started businesses, banks, and massage parlors. The economy expanded at a rapid pace.
Then one day calamity struck. Somebody noticed that as the economy and the population grew, the number of dollars wasn’t keeping pace. The dollars were becoming more and more valuable. So instead of spending his income, he began to save it. And he wasn’t the only one. Others noticed the same thing, and they began hoarding their dollars too. Soon the economy ground to a halt. Nobody knew what to do. Sam considered borrowing a bunch of dollars from Fred, but decided it would be irresponsible. So he cut back on his spending too.
Then a second calamity hit. A tribe from another island attacked, and Us went to war.
Now, while it would have been irresponsible for Sam to borrow before, wartime was different, and Sam borrowed like crazy, to pay villagers to make bows and arrows and spears.
After several years the war ended. The village warriors returned home, proudly victorious.
The people celebrated, but the village scholars were concerned. After all, nothing had really changed - except that Sam had borrowed tons and tons of money. And spent it on bows and arrows that weren’t even useful anymore! He might as well have paid people to dig a hole and fill it up again. The crushing taxes necessary to pay back all those loans would surely destroy the island’s economy.
Only that’s not what happened. What happened is that now that people’s pockets were full of money, they began spending again. And the more they spent, the more the economy grew. Soon it grew so much, all that debt Sam had taken on didn’t seem like such a big deal anymore. In fact, he didn’t even bother paying it back!
The village scholars decided it was better not to think about, and instead just be happy things worked out.
Fast forward many years. Another unforeseen, unforeseeable calamity strikes the island. People are frightened. Businesses are closing down. People are hoarding money. Since dollars not spent = money not earned, every dollar “saved” comes out of someone else’s paycheck. The economy appears to be grinding to a halt again.
“There’s an easy solution to all this,” says one man. “Sam should just borrow money from Fred, and spend it, and keep borrowing and spending until everyone who wants a job has one, and the economy is at full employment again.”
This man, of course, is an idiot, since that would lead to inflation. So instead, Sam borrows a little bit from Fred, the economy gets a little bit better, and everybody complains about how the economy isn’t getting better fast enough, while also complaining about how much Sam has borrowed. After all, everybody knows borrowing is bad.
And it’s not like you can just create money from nothing.