Money Creation Process
There are two types of money in a fractional-reserve banking system operating with a central bank:
- Central bank money: money created or adopted by the central bank regardless of its form – precious metals, commodity certificates, banknotes, coins, electronic money loaned to commercial banks, or anything else the central bank chooses as its form of money
- Commercial bank money: demand deposits in the commercial banking system; sometimes referred to as "chequebook money"
When a deposit of central bank money is made at a commercial bank, the central bank money is removed from circulation and added to the commercial banks' reserves (it is no longer counted as part of M1 money supply). Simultaneously, an equal amount of new commercial bank money is created in the form of bank deposits. When a loan is made by the commercial bank (which keeps only a fraction of the central bank money as reserves), using the central bank money from the commercial bank's reserves, the m1 money supply expands by the size of the loan. This process is called "deposit multiplication".
Read more about this topic: Criticism Of Fractional Reserve Banking
Famous quotes containing the words money, creation and/or process:
“Americans will listen, but they do not care to read. War and Peace must wait for the leisure of retirement, which never really comes: meanwhile it helps to furnish the living room. Blockbusting fiction is bought as furniture. Unread, it maintains its value. Read, it looks like money wasted. Cunningly, Americans know that books contain a person, and they want the person, not the book.”
—Anthony Burgess (b. 1917)
“There’s something wonderfully exciting about the quiet sing song of an aeroplane overhead with all the guns in creation lighting out at it, and searchlights feeling their way across the sky like antennae, and the earth shaking snort of the bombs and the whimper of shrapnel pieces when they come down to patter on the roof.”
—John Dos Passos (1896–1970)
“We tend to be so bombarded with information, and we move so quickly, that there’s a tendency to treat everything on the surface level and process things quickly. This is antithetical to the kind of openness and perception you have to have to be receptive to poetry. ... poetry seems to exist in a parallel universe outside daily life in America.”
—Rita Dove (b. 1952)