Who Prints Money?

Before we begin..

We're told from young age that money is hard to come by we should study to work our whole life to earn it. How then can all this money suddenly come from nowhere how is money created who's going to pay it back.

Let’s understand 3 terms before we proceed, Million, Billion and Trillion with an example.

1 Million Seconds= 12 Days

1 Billion Seconds=32 Years &

1 Trillion Seconds=32,000 Years.

That means if you earn $1 per second it will take you 32,000 years to make $1 Trillion, But Apple did it in only 44 years!

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” ― Henry Ford.

 

There are 3 ways that money is created

Money which is created by Government

This form of money is physical money, which either exist as notes or coins. Almost in all countries this form of money only exist as tiny percent of total economy of the nation, which is usually between 3% to 8%. Physical money is printed by central banks under the guidelines of government itself.

This money is important for private banks use is to meet the ATM cash withdraw or any other means were cash is used.

Let’s take an example, it costs ₹1.51 to print ₹100, ₹2.57 to print ₹500 and ₹4.18 to print ₹2000. So, for every ₹100 that is printed government makes a profit of ₹98.49. This revenue is known as Senior Rich. Because, government can make a profit from printing notes and coins, it reduces the burden of taxes on public.

Then why can’t government just print more money? The problem is excessive printing of money will decrease its value of overtime. i.e. if government keeps on printing money to fulfil its campaign promises or fund war, then massive inflation will take hit, such that one Apple may cost ₹1 million to buy! Some recent examples, when inflation spiked in Zimbabwe, government had to issue a note of 1 Trillion Dollar to meet the demand.

For many years’ gold was used to anchor down the creation of money, but in 1971 US government announced that it will not convert dollars for gold and removed years old anchor from money. Many nations followed this step and removed their restriction as well.

Debt based Money

The vast amount of money created today is done by the private banking sector. In most developed economies about ninety seven percent of the entire money supply is created digitally by banks and therefore most money in the world is digital.

Private banks argued that they should be legally allowed to create more create more deposits than actually exist based upon debt. the idea of using debt as money is very old. In 1704 the English Parliament passed the promissory notes Act. It's a written promise to say that you'll pay back the money you borrowed.

Similar promise is also made by Governor of RBI when issuing bank notes.

When you go to a bank to borrow some money, the banking license gives that bank the ability to create money every time they issue a loan. They do this through the double accounting system, for example if you buy a ₹5,000,000 house the bank creates ₹5,000,000 in their account and you have ₹5,000,000 in debt that is the promise to pay it back with interest.

This ₹5,000,000 debt can enter the wider economic system, because when you purchased the house the owner of that house can use that fresh debt that was created by the bank that they received from you, to buy other things in the economy.

Important Point

This means in our current system if we want to have more growth we need more debt the key point here is that debt is actually money just from a different point of view, to the lender it's an asset of money, for the borrower it's a liability of debt but they are one in the same it sounds a bit complicated, but all you need to know is that when a bank issues loan it's not somebody else's savings it's not money that the bank had, it's essentially brand-new money that they create they simply type it into a computer and it appears as a digital representation of the government's money which you can spend.

The beneficiary of this brand-new money is actually the bank because they get to charge interest on that money and that's how they make a profit later when you repay this loan the debt disappears and the money also disappears but the bank's profit from the interest remains.

Quantitative Easing

Quantitative Easing is a new form of money that was invented by the Japanese central bank in 1989. QE is where a central bank creates money in order to issue loans directly to the banking sector large corporations and most recently the public. It's a way of flooding money into the economy at times of extreme events like the financial crisis of 2008.

As a result of this the central bank's balance sheets have gone completely out of control in order to prop up the economy a little bit longer.

Central Banks were unable to reverse it, to give you an idea of how significant all of this was, it took from the foundation of America in 1776 all the way up to 2008 for the nation to attain less than 1 trillion dollars in debt by 2014 that number had expanded to 4.4 trillion and since the onset of the COVID-19 pandemic 3 trillion was added in the span of 3 months now the US central bank is creating hundreds of billions of dollars in mere hours.

Central Banks hopes that the borrowed money can kick-start the economy. but something else is happens when central banks buy bonds given by the government or corporations they can end up owning a lot of the world's assets for example the balance sheet of the Japanese central bank is bigger than the entire GDP of Japan! they own 80 percent of their stock market that's right the Central Bank of Japan is their stock markets largest shareholder.