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:
“A man is the prisoner of his power. A topical memory makes him an almanac; a talent for debate, disputant; skill to get money makes him a miser, that is, a beggar. Culture reduces these inflammations by invoking the aid of other powers against the dominant talent, and by appealing to the rank of powers. It watches success.”
—Ralph Waldo Emerson (1803–1882)
“Man is a masterpiece of creation if for no other reason than that, all the weight of evidence for determinism notwithstanding, he believes he has free will.”
—G.C. (Georg Christoph)
“Experiences in order to be educative must lead out into an expanding world of subject matter, a subject matter of facts or information and of ideas. This condition is satisfied only as the educator views teaching and learning as a continuous process of reconstruction of experience.”
—John Dewey (1859–1952)