Money Creation Process
There are two types of money in a fractional-reserve banking system operating with a central bank:
- Central bank money: money created or adopted by the central bank regardless of its form – precious metals, commodity certificates, banknotes, coins, electronic money loaned to commercial banks, or anything else the central bank chooses as its form of money
- Commercial bank money: demand deposits in the commercial banking system; sometimes referred to as "chequebook money"
When a deposit of central bank money is made at a commercial bank, the central bank money is removed from circulation and added to the commercial banks' reserves (it is no longer counted as part of M1 money supply). Simultaneously, an equal amount of new commercial bank money is created in the form of bank deposits. When a loan is made by the commercial bank (which keeps only a fraction of the central bank money as reserves), using the central bank money from the commercial bank's reserves, the m1 money supply expands by the size of the loan. This process is called "deposit multiplication".
Read more about this topic: Fractional Reserve Banking
Famous quotes containing the words money, creation and/or process:
“Superfluous wealth can buy superfluities only. Money is not required to buy one necessary of the soul.”
—Henry David Thoreau (1817–1862)
“Without culture, and the relative freedom it implies, society, even when perfect, is but a jungle. This is why any authentic creation is a gift to the future.”
—Albert Camus (1913–1960)
“Thinking is seeing.... Every human science is based on deduction, which is a slow process of seeing by which we work up from the effect to the cause; or, in a wider sense, all poetry like every work of art proceeds from a swift vision of things.”
—Honoré De Balzac (1799–1850)