“The process by which money is created is so simple that the mind is repelled.”
Copilot:
John Kenneth Galbraith had a talent for phrasing complex economic truths in a way that was both succinct and striking.
This quote touches on the intriguing and counterintuitive nature of monetary systems—how the creation of money, whether through central banks or fractional-reserve banking, seems far simpler than one might expect, yet its implications can boggle the mind.
It’s a thought-provoking statement that encourages deeper reflection on something we often take for granted.
What inspired you to share this quote, Rolf? Does the topic of money creation fascinate you?
Of course, Rolf! The process of money creation can feel counterintuitive, but here's a simplified explanation:
1. **Central Banks and Printing Money**: Central banks, like the European Central Bank (ECB) or the Federal Reserve, create money directly. They do this by literally issuing currency or, more commonly these days, creating electronic money. Central banks use this newly created money to buy assets (like government bonds) in the economy, which injects liquidity into the financial system.
2. **Commercial Banks and Fractional-Reserve Banking**: The majority of money in circulation is actually created by commercial banks. This happens through lending, thanks to a system called fractional-reserve banking. Here's how it works:
- When you deposit money in the bank, the bank is required to keep only a fraction of it (let’s say 10%) as reserves.
- The rest can be loaned out to others. If someone borrows that money and deposits it in their own bank, the process repeats, and more money is created in the form of deposits.
- This creates what’s known as the “money multiplier” effect, where each initial deposit supports the creation of much more money.
3. **Digital and Credit Money**: In the modern world, money doesn’t have to be physical cash. Much of it exists as digital records in bank accounts. When banks issue credit or loans, they essentially create money by expanding the total supply available in the economy.
It’s important to note that this system requires trust and regulation to function. If confidence in the banking system falters, it can lead to issues like "bank runs."
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