Creating Money
Money is created when a bank’s gives a loan to and individual or group and the corresponding account is credited with the given amount of money. This may sound strange to some that think of money as gold, silver, or physical currency. The truth is money is created from essentially nothing. In today’s society money is also no longer backed by gold or silver, it is backed by nothing. The government, federal reserve system, commercial banks, and separate borrowers all share different roles in the creation on new money. A checking account for example is money that a bank owes you and currency is money that the Federal Reserve owes you. Ferguson and Bond state “The reality is that hard work and productivity no longer have any direct link at all to creating money. Because of the way money is now created, money can no longer reflect the productivity of any industry or country” (Ferguson & Bond, 2002). When someone looks at creating and destroying money as simply creating or destroying bank debt it becomes easier to understand. According to McConnell and Brue there are three ways commercial banks create and destroy money. These three ways are granting a loan, repaying a loan, and buying government securities (McConnell & Brue, 2004). When banks grant loans they are forming a commitment between themselves and the borrower that the bank make the amount of the loan, new money, available to the borrower, who will in-turn pay back the amount with an interest rate attached to it. This creates new money. As the loan is repaid money is destroyed. This money is no longer available to be spent on goods that will go into the economy. When a company purchases government securities this transaction has the same effect as granting a loan. It ...