creating money

Creating Money

Today's money is a piece of whatever it is made of. Paper, linen, cotton, plastic, Abaca fiber, Gorilla's hair, name it. Government's, Central banks or whoever has monetary authority over a territory decides how many pieces of that object we call money is printed. They can print all they want so they can purchase whatever is necessary to accomplish their plans or agenda but printing too much has grave consequences. For instance, Germany during the 1920's printed too much money that it's economy experienced an insane out of control inflation. This caused the prices of goods to rise in value tremendously and fast that Germans burned their paper money for heat as it is cheaper than buying coal.

Printing more money is sometimes the result of a phenomenon called the multiplier effect. For example, a bank receives a total deposit of 100 million.
Banks are required to deposit a percentage of their reserves to the central bank, for this example let's say the required reserve ratio set by the central bank is 20%. The bank then deposits $20 million to the central bank for reserves, and its cash in vault is now $80 million.

The bank can lend out its extra cash by creating a new checkable deposit in your name. When you deposit money at the bank, they are held liable for that money you kept at their bank because when you demand for the money (withdrawal) they would have to provide the amount you requested. But for the whole time that your money was with the bank, it also counts as their asset, since they can use that money to lend out to someone else for profit.

The money supply increased by $80 million if you combine the total asset of the bank (100 million) with your "newly created" asset (80 million).

Creating Money

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