where does money come from?

Question

The global economy is a closed system, and the vast majority of the money/wealth is held in the richest few countries. So if inflation means that the average cost of everything is going up, and the total value of everything is going up, where does the money come from to allow this to happen. I know in the distant past states would simply print more money, but now most money is electronic, and how is new money injected into the system? Who's books don't balance? who gets to always spend more than they take in without getting into trouble?

Answer 1

The most common mechanism used to generate money is typically called the money multiplier. It measures the amount by which the commercial banking system increases the money supply. To control the amount of money created by the system, central banks place reserve ratios on the commercial banks which set the proportion of primary deposits the banks may not lend out. In the USA this ratio is 10%, in other countries there is no reserve ratio eg. the UK. The reserve ratio is to prevent banks from 1) having a shortage in money when a large demand of deposits is withdrawn 2) limited the amount of money that will be generated. The reserve ratio is determined by the Fed (Federal Reserve) and can be altered.

This system works as follows.

For example, let's assume that a primary deposit ie. cash of $100,000 is made into bank A. If the cash reserve ratio is 10%, then $10,000 must be kept on hand by the bank ($10,000 is 10% of $100,000) and up to $90,000 of new loans can be issued by the bank. When the $90,000 worth of loans are deposited back into the bank, this sum is added to the reserves of the bank and a further $81,000 ($81,000 is 90% of $90,000) can then be loaned by the bank out of those accounts.



An example of the creation of new money:
The following steps describe one way that new money can be created. It is an example from the US.

The government issues a Treasury security. This is simply an IOU, a promise to pay the holder a specified sum of money on a particular date. In this example, let's say the government issues $1,000,000 worth of bonds.
The Federal Reserve prints a check, in the amount of $1,000,000 and makes it payable to the government. This check is the proceeds from the sale of the bonds.
The $1,000,000 of bonds is recorded as an asset by the Fed. (money owed to the central bank is called an "asset" by the bank) It is assumed the government, with its power to tax, will make good on its debt (this is why the people buying the bonds from the fed consider it a risk-free investment). The Fed can sell these bonds which are a liability of the government. Individual investors, pension funds, mutual funds, insurance agencies, banks, foreign government central banks, can all buy the bonds, effectively loaning money to the treasury. They do this to invest their money and receive interest in return.
The government deposits the check in its own account. The government hires employees and buys things with the $1,000,000, and it does so by writing government checks. These government checks are then deposited in commercial banks. For the sake of simplicity, assume it all goes into one commercial bank, which has a zero balance to begin with.
The commercial bank now claims $1,000,000 in new liabilities (the amount on deposit in a bank is called a "liability" by the bank, because the bank has to pay interest to it, amongst other things). In the US, the law allows the bank to makes loans so longs as it retains a 10% cash reserve. This lending of money that it has on deposit is the precise point at which new money is created, because the depositor still has his money, and the person getting the loan now has money too. If the $1,000,000 is held by the bank as notes then it can lend $900,000 to borrowers.
$900,000 is loaned for various purposes eg. to buy a house. These loans are in the form of money transfer. The bank transfers the money to the buyer's attorney who transfers it to the seller, who deposits it right back into the bank. Note however, in real life that money would only come from the bank temporarily, which then would issue its own bonds or use a company like Fannie Mae to issue its own bonds, so that again investors can actually lend the money while the bank is simply a middleman, called a "servicer".
The commercial bank now claims $900,000 in new liabilities. This money is put into reserves, and 90% of that, or $810,000 is lent out. As soon as the $810,000 is deposited back into the bank, the cycle repeats and repeats until there are no more borrowers.
The total amount lent out to borrowers is $900,000. Add that to the $100,000 that it still has on deposit and the total is $1,000,000.
To summarise money is created when banks/financial institutions lend the moneys deposited with them.

Answer 2

No one does in time it catches up with you.
The money comes from the MINT and it is distributed to banks etc.
Electronic is just a way of paying has nothing to do with what you have. Your electronic transaction would not go through if you don't have enough money to cover your expenses.

Answer 3

Money is created by the central bank when it prints into the system new currency notes and coins to either finance the purchase of government bonds or to lend to commercial banks in the form of fresh deposits at the central bank for commercial banks.
It is also created by the commercial banks: as customers make their deposit the bank keeps a compulsory percentage at the central banks and issue the excess reserves in the form of loans.
Lets begin with 20000 if the reserve ratio is 20%. It keeps 4000 at the bank and gives the extra 16000 out in the form of loans. However, individuals are assumed to keep all their money at the bank so the 16000 finds its way bank to the bank, the bank keeps 20% which is 3200 in the form of reserves and gives out the excess reserve of 12800 out as loans. It goes on and on and on.
From the above illustration,with 20000 the money available after the second activity will be (4000+16000+3200) which implies that it has created 3200 more of money..

Answer 4

The physical money you hold is made in a Mint. The money that your paid is created by the Federal Bank. Through a finacial equation called the money multiplier, The Fed is able to increase or decrease the money supply by buying or selling bonds

Answer 5

Money, is a Fiat thing. Money is only numbers and that is infinite. It is used to denote reference of one thing to another. You are paid $xx.xx dollars for your time working as a ABC. I am paid $xy.xx for my time working as a ACD. We both get money of different amount because we contracted to get money of differing amounts.

In the case of goods, the parties agree on a price and the price is set. Money as it is used on earth, is paid by the Country Government. Therefore the amount the government has to pay vs the gold, silver, or other precious metals the government controls, determines the value of the countries currency.

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Answer 6

Even though governments might not physically print more money these days, the money supply is still controlled by the amount of currency they're willing to back - and can be increased, usually by government borrowing.

Answer 7

Money comes from printing pictures on paper and economic bull! To explain it simply… The fat cat say this peace of paper is worth the amount of gold I have in my stash. If I have a lot of gold one peace of paper can get a lot of stuff and if I have no gold it is good for almost nothing

Answer 8

If you put money in a bank account you get interest. So that's how it gets into the public's hands. But I don't know what banks do to get the money they give you.

Answer 9

money is a conceptual framework within which we all operate and if you add up all countries balance of payments you get a balance. that is most important not whether total value created is going up.
no new resources are created or introduced into the system; just recycled and value-added

Answer 10

Phew! some of the answers already are well complicated, and reading them gives me the impression I have had the complete wrong idea when it comes economy, so now I cannot give you the answer I was going to.......good luck with trying to get your head round this one!!