Topics: Monetary policy, Central bank, Fractional-reserve banking Pages: 12 (3639 words) Published: April 9, 2013

How Is Money Flowing with Banks?

Minjung Kang (403886)
Finance / Ludek Benada

Ⅰ. Introduction
We are living in a capitalist society. Capitalism is one of the hardest terminologies to define exactly. Nonetheless, we need to know the world we're in. It is said that modern society is a capitalist world. In other words, modern society is the world finance and money dominates over. In this paper, I'm supposed to undermine the root cause of money flowing, so to explain, how money comes into the world.

In capitalist society, people can hardly live without any money. Some people do sometimes love money too much. Is it to be blamed? Otherwise, should ignoring money be criticized? Finance capitalism is a term defined as the subordination of processes of production to the accumulation of money profits in a financial system. This system was born in England and developed in the United States, however, financial capitalism is practically the same any nationwide since fundamental principles of money circulation is almost identical everywhere. What is money?

Before figuring it out, we need to refer to prices. Considered the price of gold and slivers, gold and silvers have gone up a lot already, and in many opinions, will go ever so much higher. Rising price is not limited the price of gold and silvers. Prices seem to continue the upward course on every single good and service from our presented society. W hy are prices just continually going high? Of course, we learnt about prices in school as the laws of supply and demand work on prices. Prices are formed where the demand curve and the supply curve meet. Hence, the reason why the price has risen is that either the demand increases or the supply decreases. Nevertheless, can we say it is the only way the price is on the rise? Can we truly say that skyrocketing housing prices for less than a year could be explainable by only the law of demand and supply? Basically, there is another reason. The reason why prices are forced to climb up can be clarified by increasing the amount of money. Money in the market, in other words, money supply has increased.


From now on, this paper will regard the question how money supply has increased and examine into how money has been circulated in capitalist society where money is considered as the best value. Then firstly look into where money comes out from and how it goes around.

Ⅱ. Subjects

◆ How to Make Money
Popular belief
Many people think that most of the money comes from the central bank. Of course, it's an obvious fact that the central bank print out the money. But it is just a small fraction of money wandering in the market. The central bank prints money and creates it. However, that is not what really happens. In fact, most of money is invisible. For better understanding, I will make a supposition concerning a vague notion of banks and money.

Here is the central bank. The bank printed 100 euro recently and gave them to a commercial bank. Then A who is a small business owner got a loan from the commercial bank to buy machines and to pay staffs' salary. Fortunately, due to recent gains A first settled 50 euro to the bank. Then the bank granted a loan to B once again with that 50 euro. It is believed by many of people that the commercial banks give loan from money someone repay or save in banks. However, they don't actually lend their deposits. Banks are never going to say such as 'I am sorry. We just lend your money to Mr. Smith. Come back in 30 years.' This means banks don't make loans using their cash in the vault.

If money has circulated according to the supposition above, there should be exactly 100 euro on the market. But we all know that money on the market is much more than 100 euro. Then how is the money which is non-existent flowing on the market? The actual process

This is how to make money in reality. For instance, I kept my money in a saving account so, the commercial bank had 100 euro. Yet the commercial...

References: - Gregory Mankiw,
- Charles Nelson, 「Macroeconomics」
- United States. Congress. 1964, House Banking and Currency Committee
- Federal Reserve Bank(FRB), 1963, Modern Money Mechanics
- Roger Langrick,
「 A Monetary System for the New Millennium (2010) 」
- Alfred Mitchell-Innes, 「What is Money? (1913)」 and 「The Credit Theory of Money(1914)」
- Andrew M. Gause, The Secret World of Money
- Elloen Brown, The web of debt
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