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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? |
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Subject:
Re: Finance. Do governments create money?
Answered By: cynthia-ga on 27 Apr 2006 00:19 PDT Rated: |
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" | |
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daronryan-ga
rated this answer:
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. |
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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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