(Note: this post is not about physical cash or coin, which I trust most people correctly understand to be minted by the government. It is instead about a more complete measure of money in all its physical and non-physical forms: cash, coin, demand deposits, savings, etc.)
Courtesy of Dan Hind here's a simply explanation of how money is created:
Banks create money through the act of lending it. They don't have to limit themselves to lending out the money deposited with them. In fact, they can end up lending huge multiples of the money they hold in reserve.
When they authorise a loan or extend credit in the form of an overdraft, the money is conjured out of nowhere.So there you have it. Banks create the vast majority of the money supply out of thin air (electronic bits these days) when they make loans. Simple, right? Here's Dan again:
The economist and ironist JK Galbraith once wrote that "the process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent". Offered the unadorned truth, stripped of any technocratic flim-flam, we can scarcely believe it. It seems preposterous that money should have such humble origins, as though it is beneath money's dignity that it should begin life at a banker's keystroke.
The truth about money creation is a bit like the end of The Wonderful Wizard of Oz, when it turns out that there is no all-knowing wizard, only an old man behind a curtain, making things up as he goes along.A perhaps more interesting question is why the subject of how money is created is not taught in secondary school? The reason can't be that it's too complicated. But as one of the commenters on Dan's article notes:
"it is truly preposterous how little the public knows about arguably the single most influential conception humanity has ever created."Education Site: Educate yourself on various aspects of the financial industry with classes from accredited online colleges.
This doesn't cover "...a more complete measure of money in all its physical and non-physical forms." Another process of creating money is mining, refining and coining gold or silver.
ReplyDeleteAnon,
ReplyDeleteIn most countries at present gold and silver do not qualify as money, meaning you cannot walk into a store and pay for something with gold, nor can you pay your taxes with gold.
Gold and silver can instead be exchanged for money, much like your labor and other goods can also be exchanged for money. Money can take many forms but it ideally has the following three properties: a) unit of account, b) medium of exchange, and c) store of value. Gold and silver only meet the c) requirement.
Whether or not gold and/or silver should be acceptable legal tender is another question.
Last but not least, if you've been following the price of gold and silver it's clear that many consider these two precious metals to be better than money in the current monetary environment. The first post ever made on this blog in early May 2010 was about the advantages of gold.