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How money is created around the world?

How money is created?

How much is Trillion Dollars?

Think in this way….

Let one million seconds = 12 days

one Billion seconds = 32 years

one Trillion seconds = 32000 years

But Why are we talking in Dollars but not in rupee or any other currency. Dollar being the world reserved currency, will be very easily understood by most of us.

Lets begin..

Around the world we see the central banks print the money. But we told from our own childhood that money is very hard to earn and we need to study hard and work for life to earn the money.

But no one told us how money is created? Every one says only about how to earn.

Today I will share you, how money is created around the world.

There are 3 ways to create money in any economy.

1. Money created by Government.

Government create money indirectly, by outsourcing to the central bank of the economy. Money created by central bank will be in two forms. 1) coins & 2) paper money (i.e. notes). This money is only about 3-8% of the money that we see in the economy. But wonder how the remaining money comes from? To know read to the end.

Physical Money

Even this physical money is created only in-order to meet the obligations of the private the banks.

Ever wonder how much costs to make/print the money? For example to make 10 dollar note, it takes only 3 cents and the remaining $ 9.97 cents are profit to government. This $9.97 cents can be added to governments tax revenue. And this revenue is called as SEIGNIORAGE. This being the governments revenue, you might be thinking that why they don’t decrease taxes to be paid on public. Why the government printing money always to clear out all the debt?

Consequences of Excess printing of money

But this might results in Inflation and make money lose its worth. you wont believe in me? you have a look at Hyperinflation_in_Venezuela. In simpler words even million dollars wont get you a meal per day.

1 USD equals to 47883 VES in 2019

As inflation rate goes up people tend to loose faith in the currency. For 1000’s of years the gold is used as the measure of money. But in 1971 USA president gave a announcement that gold cannot be used to measure money anymore. This created revolution around the world and from then we are seeing the inflation in the economy.

2. Money created by private banks:

Most the money is created by banks. But its not physical money like created by government. Its completely “Digital”. yes you heard it right, its digital money. In most developed economies the around 97% money is created by the banks.

But wonder whats the digital money? you can consider a promissory note as a digital money. Any debt can be considered as digital money. For example when a consumer want to buy an house and he borrows money from the bank saying that he will pay it back with interest. so bank creates the money and lends it to the consumer. Here i mean by creating is not any form of printing money. banks use that 3-8% of money created by government which they got it from the deposits of savings/current accounts. So this is how the money will be in circulation. it sounds a bit complicated but when the consumer pays back the debt and interest. bank earns the profit on money which is not theirs. Banks mostly give debts in real estate, as they feel its the safest bet they can keep on.

How banks create and make money

But are you feeling that your money is not safe with bank now? Don’t panic. This is how private banks work , this process is known as Fractional reserve banking which is a banking system in which banks only hold a fraction of the money their customers’ deposit as reserves. This allows them to use the rest of it to make loans and thereby essentially create new money. This gives commercial banks the power to directly affect the money supply. but there is a announcement from the government that there is no need for the reserves as per the current situation, Covid-19 and can lend out the 100% of your deposited money.

If there are no borrowers, banks don’t keep the deposited money idle. They invest in different securities and try to multiply the money.

As around 97% of money is made from debt, when it cannot be paid back then the economy would collapse and then central banks will bail out the private banks.

3. Money created by Central banks:

This happens only in situations like now, Covid 19 or any financial crisis. Central banks buy the T-bills, bonds from the government. But this will be burden on Tax payers, because the public will be paying it back to government in form of tax or increased interests.

Central banks cannot go bankrupt. but they are buying the real assets with just a digital money. This is how they can bailout the stimulus packages. but why the economy didnot revive even after the stimulus packages all over the world?

When ever there is creation of money there will be increase in inflation. But haven’t seen yet the inflation in the economy?

its because the inflation comes into existence only when the money gets circulated between the people. unless then there wont be any inflation. By this stimulus packages only rich people get benefited. so rich will becomes rich always.

But what can individual do to be safe from this all cycle and be debt free? I am not an financial advisor but can tell you the options that can save you from this situations.

  • Gold
  • Silver
  • Crypto currency
  • Equities (stock market)

But YOU need to take decision how you are willing to take step forward. But take the intelligent decision so that you wont regret it after a decade.

For more follow Learn Investing


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