Creation Of Money

Joe writes:

Tony,
Watch this video:
http://hiddensecretsofmoney.com/videos/episode-4
It explains what I was talking about with banks creating most of the money supply.
Cheers


Tony writes:

I got to 9:41 into the video and found the bit that I disagreed with.
So I agree with the first bit where the central bank (in this case the
federal reserve) creates money by giving the bank a cheque. Then the
video goes on to say that when a deposit is made, 90% is invested and
10% is kept. This is correct, but it is *not* money creation. Putting
money into a bank account that pays interest is an *investment*. If
you want to avoid investing, then put the money in a safe deposit box.


Joe writes:

You are missing the point - with fractional reserve banking you end up with 10 times as much cash in circulation as the original deposit. It is money creation. It is loaned into existance.


Tony writes:

If you have £100 and deposit it in a bank, they'll store £10 and invest the rest on your behalf. That £90 that they invest may well end up being deposited in a bank, and so on, but there's still only £100 in existence, no money has been created.


Joe writes:

In your scenario there is now £190 in existance. the original person still has £100 and now the next person has £90 that they need to pay back with interest. This cash is can be used to bid up priced and is inflationary.
 
Without wanting to sound patronising there are plenty of explanations about how it works and with different scenarios.


Tony writes:

No, there's still only the £100 pounds. When it says £100 on your bank
balance, it seems like you've actually got £100, but really the bank's
gone off and invested £90, so you've actually got £10 and a promise
from the bank that it'll *try* and get you the £90 back if you
withdraw it. So sometimes you get a 'run' on the bank, where everyone
tries to get their original investment back, but that can't be done
immediately (and maybe not at all) because they've only got the £10
that they didn't invest. If the bank made good investments with your
money they'll get it back eventually, but if not then you'll never see
your money again. Unless of course the tax payer bails the bank out.
But at no stage does the bank create new money, only the central bank
can do that.
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