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QUESTION: Can banks create electronic money as they want or base on reserves and how ?

ANSWER: Banks don't actually create money at all, treasuries do.  Treasuries, as an extension of the government, create money as a part of government policy, generally to simulate economic growth during a recession.  The creation of money causes inflationary pressures, that's true, but during a recession when inflation is already near or below 0, that's a minute concern.  It does, however, increase spending and lending, both of which increases growth, and inflation also increases exports, also helping to bring a nation out of recession.

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QUESTION: Thank you so much for your answer , but I meant when people put 1 billion in bank , in fraction reserve system , can bank create 10 times more than 1 billion in electronic money ? (If reserve 10%)  if not , I read that in fraction reserve system banks create 10 times more than they have in deposits , how ?


Thank you so much .

ANSWER: That's not quite how that works,  In a fractional reserve system, banks do not create money.  Let's say reserve ratio is 10%; if people deposit $1 million, then the bank is required to keep $100,000 (10% of $1 million) on reserve - in the bank at all times.  The other $900,000 they are allowed to lend as loans.  That's how banks make their money.  They accept deposits from other people and pay those people interest.  The bank then lends out that money to borrowers and charge them a higher rate of interest than depositors are earning.  The difference, called the spread, is what banks earn.

If a bank gets $1 million is deposits, that doesn't mean they can keep that $1 million and lend out $10 million.  It means they must keep $100,000 on-hand, and lend out $900,000.  Banks cannot create money, only governments do that.

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QUESTION: Thanks so much for answers, help me a lot , I have last question : If company have producs and services worth 1 billion and treasury want buy them , let say , treasury does not have money and market refuse to lend them . Treasury print 1 billion and buy products and services from company , does that make inflation ? ( if yes why?)



Thank so much .

Answer
The treasury doesn't buy things.  The government buys things and the treasury just distributes the money.  If the government decides to pay for something by making more money, then yes, this causes inflation.  This is 1 form of inflation called monetary inflation.  It occurs for multiple reasons.  First, as supply increases as a ratio of demand, value goes down.  This causes a decrease in demand for the currency, reducing its value as investors turn away from it for fear that it will no longer maintain its value if the government simply starts printing new money to pay their debts.  Second, the ratio of currency per GDP shifts; for the total amount of production in a nation, there are now more units of currency per units of good produced.  Since a fiat currency is representative of the production potential of a nation, if there are more units of currency for an equivalent GDP value, then each unit of currency represents a small proportion of total GDP, reducing its value.  Finally, by increasing the amount of money in circulation, it increases the amount that people have to spend, increasing aggregate demand in the nation, along with increased exports resulting from the inflation, contributing to greater rates of inflation.

When governments start printing money carelessly to pay their debts or buy stuff, we frequently end up with a state called hyperinflation.  This occurred in Germany between WW1 and WW2, in France during the late 1700s, and in many other nations throughout history.

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Michael Taillard

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Consulting with major corporations, government agencies, political organizations, small businesses, non-profits, start-ups, and even individual people. Teaching at universities around the world, and developing original coursework. Performing original research and analysis. Writing books and scientific studies.

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American Economics Association

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http://www.barnesandnoble.com/s/michael%20taillard You can also check Proquest for a small selection of my research.

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PhD (Financial Economics; honors) -- MBA (International Business Finance; honors) -- Grad School Certificate (International Business Management; honors) -- BS (International Business Economics; honors) -- AA (Business Administration; honors) -- Certificate (Chinese Language and Culture) -- Trade School (Transportation Logistics; honors)

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