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Q: Finance. Do governments create money? ( Answered 2 out of 5 stars,   7 Comments )
Question  
Subject: Finance. Do governments create money?
Category: Business and Money > Economics
Asked by: daronryan-ga
List Price: $2.00
Posted: 25 Apr 2006 05:44 PDT
Expires: 25 May 2006 05:44 PDT
Question ID: 722581
Do western democratic governments create additional money
periodically? How do they do this?
Answer  
Subject: Re: Finance. Do governments create money?
Answered By: cynthia-ga on 27 Apr 2006 00:19 PDT
Rated:2 out of 5 stars
 
Hi daronryan,

It's a bit more complex than printing the actual notes, and there's
not one method. Here's some links that will walk you through the
mental gymnastics of several of the methods used to create money where
there was none before.

REFERENCES:

Creation of Money
http://money.zezenetwork.com/articles/creation_of_money.htm
..."The process of money creation that underlies our banking system in
the U.S. and other countries is widely misunderstood and frequently
the topic of misguided theorists.  It's really not that difficult and
there's nothing sinister or mysterious about it.

What it's not
The creation of money has nothing to do with minting coins or printing
currency, although the Federal Reserve does use the amount of money in
circulation as an indicator in making decisions on the control of the
money supply.  The creation of money has no other relationship to
interest rates and the money created is not interest.

How is Money Created?
Financial institutions create money by taking in deposits of cash and
checks, and lending a portion of this money out in loans.  Banks are
required to keep a percentage of their deposits in reserves in the
form of cash in their vault or deposits at their regional Federal
Reserve Bank.
The amount of required reserves is determined by the Fed, intended to
meet the normal demand for cash by the bank's customers (liquidity)
and to give the Fed a way to adjust the money supply by raising or
lowering the reserve requirement.  The reserves (or deposits) are non
earning assets, therefore banks are motivated to convert as much of
the excess of non earning assets (cash) into earning assets (loans) as
they can in order to be profitable.  Money creation is a result, but
is not the intent..."


Money creation
http://en.wikipedia.org/wiki/Money_creation
..."There are several ways that a government, in coordination with the
country's commercial banks, can increase or decrease the money supply
of a country. If a country follows a fractional-reserve banking
regime, as virtually all countries do, not all of the money in
circulation needs to be backed by other currencies, physical assets
such as gold, or government assets. Instead, the country's currency is
backed by the economic potential of the country and is based on
government fiat, or decree. This perceived potential puts a
theoretical limit on the amount of money a country can prudently
create..."


HOW PRIVATE, COMMERCIAL, NATIONAL and INTERNATIONAL
MONEY is CREATED 
http://www.prosperityuk.com/prosperity/articles/moneymake.html
FROM THERE: How COINS and NOTES are CREATED 
..."The significant point about coins and notes money created by the
government is that this money is created debt-free, and spent into the
economy by the government. This is a vital consideration, and it is
therefore important to appreciate precisely how this injection of
debt-free money is managed. Coins and notes are minted and printed by
the government at no cost, apart from that of materials. Of course,
governments have no particular need of these coins and notes; banks
are the institutions requiring a supply of cash. The government
therefore sells the coins and notes that it creates to banks, who pay
by cheque, and the government acquires the face value of those coins
and notes in number-money. The sum of money which the government
obtains, and which is debt-free so far as the government is concerned,
is then added to whatever taxation revenue has been raised to fund the
public sector. Thus, coins and notes are created by the government,
and an amount equivalent to the face value of those coins and notes is
spent into the economy as a direct, debt-free input..."


Hope this illustrates the many different ways money is created. If I
can assist further, please use the clarification feature.


~~Cynthia


Search strategy:
"money creation"

Request for Answer Clarification by daronryan-ga on 05 May 2006 03:04 PDT
It is correct that this has answered my question but I was hoping to
get some more detail. Do the government follow certain rules when
deciding to create more money? What rules are they following? Now that
I see the answer I realize that there is another question that I was
really trying to get answered. To explain what I mean I should first
say that I was already familiar with fractional reserve banking. The
issue I am interested in is the printing of new money. I was figuring
that the government did do this. What I am realising that I want to
know is how can I observe the process happening? Are there particular
statutes that state what is happening? Can I find a website run by the
government somewhere where I can read these statutes? If it happens
each year can I read a publication from the government saying how much
they printed each year?

Clarification of Answer by cynthia-ga on 05 May 2006 08:25 PDT
You're changing parameters on me! I can clarify, but can't answer 6
new questions for the same $2.00...

1) Do the government follow certain rules when deciding to create more money?
2) What rules are they following? 
3) What I am realising that I want to know is how can I observe the
process happening?
4) Are there particular statutes that state what is happening? 
5) Can I find a website run by the government somewhere where I can
read these statutes?
6) If it happens each year can I read a publication from the
government saying how much they printed each year?


Consider this:

Sample Questions at Various Price Points $2 - $5
http://answers.google.com/answers/pricing.html
..."Can be answered with a single link or a single piece of
information. Sometimes, if a researcher is personally interested in
the question's subject, they may provide a longer answer.

    Not appropriate for multipart questions..." 


I recommend opening a new question (in the $50-$75 range) to get these
answered... Be sure to include a link to this question so the
researcher may use my links to get started..

~~Cynthia
daronryan-ga rated this answer:2 out of 5 stars
I am dissapointed in this answer. I already knew about fractional
reserve banking and do not consider it to be the creation of money but
simply a process that gives the impression of creating money. The
interesting part in the answer is the reference to the prosperity uk
site. Unfortunately this site does not seem to provide evidence of
it's assertions and a commentator at google answers has denied those
assertions. Therefore I have not received a response that properly
answers my question and which I can be certain is true. Claude Shannon
defined information is that which reduces uncertainty. By that
criteria my uncertainty has not been reduced and consequently it is
doubtful whether I have received any information. However I am
grateful for the link to the site which I will investigate when I find
further time for this interest.

Comments  
Subject: Re: Finance. Do governments create money?
From: daniel2d-ga on 25 Apr 2006 22:57 PDT
 
All governments create money.  They do it by printing it.
Subject: Re: Finance. Do governments create money?
From: owejessen-ga on 28 Apr 2006 01:34 PDT
 
Just as an aside: The link between reserves and money creation seemes
to have diminished in recent years. The reasoning is that banks are
not automatically giving away as much credit as possible (that would
amount to money=deposits/rate of reserves) but according to the money
demand of the economy, which becomes a function of the interest rates.
Thus the central banks try to govern the money supply through setting
of refinance-interest-rates more than through setting of reserve
rates.
Subject: Re: Finance. Do governments create money?
From: myoarin-ga on 05 May 2006 04:04 PDT
 
Perhaps it should be pointed out that governments could only increase
the money supply through printing more bank notes if they then put
these in circulation by paying cash for services and purchases  -
which countries with better regulated financial systems do not do. 
Cash only enters the system via bank transactions:  a bank orders cash
from another bank or a Federal Reserve bank, "paying" for it by
transferring funds from a bank account or by allowing the other bank
to debit its account with that bank, just as happens when an
individual gets cash from a bank at the teller's cage or from an
machine.  This does not increase the money supply, again, just has
your holding cash instead of a higher bank balance does not make you
richer.
The reserve bank prints new bank notes all the time, but mostly to
replace worn-out notes (and older ones that are less secure against
counterfeiting).
If the value of notes in circulation increases  - as it does -  this
follows the increase in money resulting from bank lending.
Subject: Re: Finance. Do governments create money?
From: tutuzdad-ga on 20 May 2006 12:27 PDT
 
Actually, what Claude Shannon asserted was that decreases in
uncertainty tended to correspond to the information content in a
message. There's a BIG difference.
Subject: Re: Finance. Do governments create money?
From: myoarin-ga on 20 May 2006 15:44 PDT
 
I think the above comment was intended for a different question.
Subject: Re: Finance. Do governments create money?
From: daronryan-ga on 26 May 2006 05:45 PDT
 
The question I am asking is simple. Some of the responses have been
yes and some have been no. I would prefer future comments only be
posted if they are brief and accompanied by some kind of evidence. The
link http://www.prosperityuk.com/prosperity/articles/moneymake.html
was a good response.
Subject: Re: Finance. Do governments create money?
From: jcolor-ga on 22 Aug 2006 19:04 PDT
 
I would be nice if someone could explain how to create money from the very start: 

Assume that you and a few friends just washed on a desert island. You
form a democratic government; create a central bank institution, form
a few banks, decide on a reserve ratio, etc... It is decided that cash
(i.e. bill, coins) will never be used on this island.

How do you create ?final money? (= money deposited at the central bank
by commercial banks http://en.wikipedia.org/wiki/Central_bank 
http://www.atimes.com/atimes/Global_Economy/GJ27Dj01.html ): On the
first day of our new government the commercial banks have no money, so
they can not deposit any.

The first step could be for the new government to create out of
nothing a balance of (say) 1000 monetary units for the central bank. I
did not find anyone mentioning this as a way for governments to create
money, so this is probably to be ruled out.

The examples cited to create money in the wider sense
(http://en.wikipedia.org/wiki/Money_creation ), start with the
government selling government bonds to individuals and then using that
money in the economy. That money is then, thought successive lending
by commercial banks, expanded by the reserve ratio (a factor 10 or
so): But again on day one, no individuals on the island have money, so
this mechanism does not apply.

Can a classical government money creation mechanisms be used to create
money for our island?

One last thought: I doubt that the first step is for our new
government do give money to all equally: I have never heard that used
as a way to create money... and it?s way to egalitarian for our island
government.

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