Money’ as widely accepted medium of exchange consists of tangibles like currency notes and coins, or intangibles like a bank deposit, thanks to the concept of Fiat Money over the old commodity money system also called barter system. Presently, almost all monetary transactions involve transfer of bank deposits.Fiat Money: Money as paper vouchers and coins have no value in itself, the Government as prime authority of the nation, made money as legal tender by official order and law. So, fiat money is the money that has the value to transact freely ‘by government authorization’ and include currency, coins and all government-issued tokens of exchange.
The term Bank usually refers to any financial institution that is licensed by government to accept deposits and issue credit money through loans.
Debt based monetary system
The monetary system currently followed by the nation often described as debt based, which means debt being used to create and supply money in the economy. According to the debt theory’ Banks create credit by lending money to borrowers and forward to industries, consumers and governments. This credit kept expanding in the broader economy, until ‘if ever such time all the loans get repaid.
Credit in the financial system has become what the blood in human body, thanks to the large network of our banking system.
You may already heard the traditional theory provided by many authors that total money supply created by Fed (by printing currency) is lower than 10% and the other 90% or more money is created by private banks.
Do banks really create money?
The experts’ opinions vary between two theories’ one affirming and other declining that private banks do create money or not.
While many experts confirm the theory of credit money creation by banks. As they thoroughly describe, how base money created by the Fed circulates in the economy and increase the money supply drastically or how banks create money out of thin air, just Google the italic phrase and see how they push the concept with examples.
The money creation theory is based on the assumption that money supply is the sum of base money circulating in the economy with each and every transaction from individual to individual.
Base money: As many theorists believe, the monstrous piles of loans by banks have been issued over the base of minuscule (in comparison) money supply by the fed. This initial money supply actually created and issued by the central bank, generally termed as base money.
A Brief Analysis
No doubt, private banks increase money circulation but they can’t create money and if they ever independently try to create money with unaccountable debt, the outcome will surely be as disastrous like the Individual Investment bankers, those cease to exist from the beginning of the present economic crisis due to unaccountable debt in billions of US dollars.
Surely banks have lately reached the line of fire but were saved by the setbacks to the big financial institutions, hope the lessons were so shocking to forget forever.
Under the Fed regulation there are less chances that any bank consider creating bulk of unsecured credit money, the fed support is the oxygen for the banking system to breathe.
Simply, in the current liquidity crisis worldwide, banks are in trouble to increase credit flows or say money supply. They haven’t created money to solve their problem and central banks are flooding newly created money in the financial system.
Bankers can pressurize the Fed to increase money supply with the political interests but that’s the separate issue, from the topic of financial analysis.
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Money creation Banks Economy Analysis Deposits Debt Financial Monetary System Fed Bankers fiat money base money loans
