How money is created?

Credit money hands - Watchara Ritjan - shutterstock_523778230

As a ubiquitous means of payment, most people don’t even notice it much anymore:

We are always and everywhere surrounded by money in our everyday lives – and those who earn just that as investors or stockbrokers, even more so.

But how is money created in the first place and what kind of system is behind it??

In this context, we would like to take a closer look at this most fundamental of all financial questions:

The creation of money

The process behind the creation and circulation of our means of payment is called money creation.

Basically, there are 2 different types of money:

On the one hand there is the money, which is created by the central bank in the form of banknotes and coins and on the other hand the so-called Giral or book money, which is created by the commercial banks.

While coins and banknotes are, of course, actually physically present and are minted or. printed, book money exists exclusively virtually.

Modern money creation

The question, how in the today’s time money develops, can be answered primarily with the credit assignment. It is created through various accounting processes within the banking system.

Credit institutions can create money on credit accounts by granting loans to their customers against the pledging of collateral. This can be z. B. Mortgages on real estate or securities can be.

After the credit is granted, the borrower can dispose of a credit balance from an account at his bank up to the amount of the credit granted.

They can use it to make payments by transfer to the accounts of other customers of the same or other banks, write checks on it, or have cash paid out to them.

Money is created through this process.

Example: How money is created?

Let’s assume that a bank customer needs for a certain investment 20.000 €.

So he goes to his favorite financial institution and takes out a loan for the amount he needs.

The bank also grants him this credit because the customer has a regular income as well as a home of his own.

So you will now open a credit account and fund it with 20.Charge € 000. At the same time they transfer a counter entry of 20.000 € to the current account of the customer.

So now 20.000 € created. The total quantity of money in circulation is thus around 20.000 € grown, which did not exist before.

Less and less cash

As a result of this electronic payment traffic, the proportion of cash in the total money supply is becoming smaller and smaller.

In 2007, the ratio of cash to book money in the euro area as a whole was already around 1:12.

Theoretically, there is no upper limit to the amount of money created by credit institutions.

However, in order to keep money creation in check, in addition to balance sheet regulations for credit institutions, depending on the country, there is an obligation to hold a minimum reserve of central bank balances with the central bank.

Microcredit – Definition& Overview Investing in microcredit is usually a socially responsible investment with manageable returns. ‘ read more

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