Where Money Comes From ( World Wide Money )

Where Money Comes From:-

💰 Money doesn’t grow on trees. But the truth isn’t far from that. In fact, money is manufactured inside the 🌐 world’s central banks, especially the United States Federal Reserve System, essentially from thin air.

When I talk about the Federal Reserve, unless I say otherwise, I also refer to other 🏦 central banks, because they all work similarly. When there are important differences in the way they go about their 💼 business, I also let you know.

🏦 Central banks create money either by printing it or by buying bonds in the treasury market. When central banks buy bonds, they usually buy their own country’s treasury bonds, and their purchases are made from banks that own bonds. The money from the 🏦 central banks goes to the bank vaults and becomes loan-making capital.

When the Fed wants to 💹 increase the money supply in the U.S., it buys bonds from banks in the open market and uses a pretty simple formula to calculate how much 💸 money it is creating.

Instead of using 👑 gold as the basis for the monetary system — as was the custom until 1971, the Fed requires its member banks to keep certain specific amounts of 💸 money on reserve as a means of keeping a lid on the uncontrolled expansion of fiat money — in other 🌐 words, to keep the money supply from 💥exploding. These reserve requirements are the major safeguard of the system.

When the economy 🐢 slows down, the Fed attempts to jump-start it by lowering interest rates. The Fed lowers interest rates by injecting 💸 money into the system. The monetary injection is sort of like a flu shot for an ailing economy. But instead of a 💉 vaccine, the Fed injects money into the system by buying bonds from the banks.

To keep the system from becoming inflationary, the Fed keeps a lid on how much banks can lend by using a bank reserve management system. The reserve management system, to be sure, is not an exact science, but over the long haul, it tends to 🏬 work as long as the public buys the validity of the system, which in the United States, it does.

📑 Here’s how the reserve requirements work:

📝 If the current formula calls for a 10 percent reserve ratio, it means that for every dollar that a bank keeps in reserve, it can lend ten dollars to its clients.

📝 At the same time, if the Fed buys $500 million in bonds in the open market, it creates $5 billion in new money that makes its way to the public via bank loans.

📝 The reverse, or opposite, is true when the Fed wants to tighten credit and slow down the economy. It sells bonds to banks, thus draining money from the system, again based on the reserve formula.

Money’s money because we say its money:-

Most of the 🌐 world’s money is called fiat money, meaning it is accepted as money because a government says that it’s legal tender, and the public has enough 😎 confidence and faith in the money’s ability to serve as a storage medium for purchasing power. A fiat system is based on a government’s mandate that the paper currency it prints is legal tender for making 📒 financial transactions. Legal tender means that the money is backed by the full faith and credit of the government that issues it. In other words, the government promises to be good for it. I know how it sounds. But that’s what the world’s financial system is based on.

Fiat money is the opposite of commodity money, which is money that’s based on a valuable commodity, a method of valuation that was used in the past. At times, the commodity itself was used as money. For instance, the use of 👑 gold, grain, and even furs and other animal products as commodity money preceded the current fiat system.

Something from something is something more – the money multiplier effect.

The wildest thing about money is how one dollar counts as two dollars whenever it goes around the loop enough times in an interesting a little concept is known as the multiplier effect.

For example 📢,

If the Fed buys $1 the worth of bonds from Bank X, then Bank X lends it to Person 1. Person 1 then buys something from Person 2, who then deposits the dollar in Bank 2. Bank 2 then lends the money to Person 3, who then deposits it in Bank 1, where the $1, in terms of money supply, is now $ because it’s been counted twice.

By multiplying this little exercise by billions of transactions, you can arrive at the massive money supply numbers in the United States, whereas of late 2004, the M0 alone was $688 billion.

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