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  • How Money Is Created

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    Darveen Vijayan
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    1. Physical cash makes up 3-8% of the money supply, which is created by central banks to meet obligations of private banks. Only a small fraction is needed to produce notes, with the rest going to government as tax revenue. Excess printing causes devaluation and inflation over time. 2. Private banks create 97% of the money supply digitally through lending. When a bank issues a loan, new money is created and can be re-lent many times over. Banks are licensed to generate money through lending and destroy it when loans are paid back. 3. Central banks back private bank lending through treasury bills, bonds, and government guaranteed securities. The more private banks lend, the

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    1. Physical cash makes up 3-8% of the money supply, which is created by central banks to meet obligations of private banks. Only a small fraction is needed to produce notes, with the rest going to government as tax revenue. Excess printing causes devaluation and inflation over time. 2. Private banks create 97% of the money supply digitally through lending. When a bank issues a loan, new money is created and can be re-lent many times over. Banks are licensed to generate money through lending and destroy it when loans are paid back. 3. Central banks back private bank lending through treasury bills, bonds, and government guaranteed securities. The more private banks lend, the

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    5 views1 page

    How Money Is Created

    Uploaded by

    Darveen Vijayan
    1. Physical cash makes up 3-8% of the money supply, which is created by central banks to meet obligations of private banks. Only a small fraction is needed to produce notes, with the rest going to government as tax revenue. Excess printing causes devaluation and inflation over time. 2. Private banks create 97% of the money supply digitally through lending. When a bank issues a loan, new money is created and can be re-lent many times over. Banks are licensed to generate money through lending and destroy it when loans are paid back. 3. Central banks back private bank lending through treasury bills, bonds, and government guaranteed securities. The more private banks lend, the

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    of 1

    1.

    Physical money -3-8 % Central Banks

    - Money created by the government outsourced to the central bank.


    - Created to meet the obligations of private banks
    - 3 cents is used to produce a 10 dollar note = 9.97 goes in tax revenues to the
    government = Seigniogare
    - Excessive printing causes devaluation
    - Inflation = the loss of purchasing power over time (currency value drops)

    2. Private Banks 97% digital bank money


    - Originated from bank runs – a lot of people try to take their money out of the bank, but
    the banks dot has enough
    - Debt is given out by banks, they are free to create and destroy them, rented out as
    interest
    - Banking license gives the bank ability to create money every time a loan is issued

    Debt = money

    Lender = Asset, able to mortgage the property if loan is not paid

    Borrower = Liability

    GDP = the market value of the company/country: gross domestic product

    The central bank backs up private banks by:

    1. Treasury bills
    2. Bonds
    3. Government guaranteed securities

    The more the money that is being created the more the taxpayers need to pay the debt with interest

    Fractional reserve landing = 10% is reserved / 90% is lent out as loan to others from your deposits

    Fiat money = inconvertible paper money made legal tender by a government decree.

    Commodity money: Money that derives its value from the substance or the potential use of the
    money itself. Such as gold

    4. Central bank
    - Quantitative easing
    - The federal bank issue loans to private bank, company’s and public
    -

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