If you ask a "man from the street" about what money is, most likely he will show you metal circles and sheets of paper with numbers printed on them. It is this association that occurs in most people when pronouncing the word "money".
Real value of money. Subtopic
Have you ever wondered if they are of real value?
Let's read, for example, what is written on 100 dollars.
It only says "federal reserve note".
That is, in fact, these are some obligations of the Federal Reserve System.
But, if you dig deeper, it turns out that you can exchange these 100 dollars for exactly the same 100 dollars.
You can look - it's even written in Wikipedia.
You have just realized the whole essence of the "Jamaica Accords", in which we all now live.
In general, the issue of filling banknotes with real value deserves a separate discussion.
Is a plastic card money?
And what happens when you pay, for example, with a credit card?
No "papers" or "metal circles" change hands.
It turns out that there are some "other money"?
In fact, with this electronic payment method,
the bank that issued your card reduces the amount available to you,
and increases the amount available to the store.
So far, we don’t see anything suspicious, because, before that,
we ourselves took the money to the bank and put it into our card account through the terminal.
But, if our card was a credit card...
This is where the "magic" happens, which we'll talk about now.
How is credit money created?
Imagine that we have some fictitious country
in which there is a single bank.
And there's $1,000 in that bank.
And this thousand dollars successfully lies in the bank vault in the form of banknotes.
How much money is in our state?
The answer is clear - 1000 dollars.
And so, the first client comes to us. He borrows $1,000.
What does the bank do?
The bank credits a thousand dollars to the client's account.
How much money is in the country?
And then a surprise awaits us!
Our thousand dollars, which was in the bank vault, has not gone away and it is still there.
But on the client's current account, by making a regular electronic entry, there is also 1000 dollars!
There are already two thousand dollars in our state!
1000 is physically in the vault of the bank and 1000 on the current account of the client who received the loan.
Further events unfold even more interesting.
The client took a loan "not just like that."
He went to the store and made some purchase.
The money is credited to the bank account of the store in the same bank.
1000 dollars lies in the bank's vault
and 1000 lies on the store's current account and this is his real money.
The bank sees "free funds" again.
What is he doing?
He issues a loan to the next customer.
We consider the amount of money in the state.
1000 in the vault, 1000 in the store's current account and 1000 in the customer's credit account.
And, if the banking sector were not regulated at all, this process could continue indefinitely.
With all this, the bank's $1,000 from the vault did not move anywhere at all!
Now let's take a "step back" and see what happened.
The bank, having a thousand dollars, issued loans for two!
In fact, the loans were issued with money that never materially existed!
Neither "metal circles" nor "sheets of paper with numbers" moved.
The role of banks in the creation of money supply
There is another important consequence.
Please note that no one turned on the so-called "printing press", and the amount of money in the country increased by as much as three times!
Of course, both the government and the bankers understand this "trick".
And, therefore, the process of money production by banks "out of thin air" is strictly regulated.
Why this process should be regulated, I think, it is not necessary to explain.
If at least one of the participants in the chain tries to withdraw their money, the entire "pyramid" may collapse.
Therefore, banks are required by law to form the so-called "reserves".
I will not complicate you with details, but, "in a nutshell" - it is impossible to issue all the money available in the bank as a loan.
We can only give out a part of them. Moreover, this part is strictly regulated.
In addition, a limit is set on the amount of loans issued in relation to the bank's own capital.
And now we move on to the first important conclusion:
it is absolutely legal to make money out of thin air, banks do this on a regular basis and the process is controlled.
What is money?
As you already understood, this concept is not limited to the number of banknotes and metal circles.
That is, there are many payment methods and money can be in the most diverse form.
For example, in electronic form.
Therefore, economic theory operates with the concept of "monetary aggregate".
There are several monetary aggregates, but we will consider only the most important ones.
The monetary aggregate, in other words, the "money supply"
is the totality of money balances in all possible forms that are at the disposal of the subjects of money circulation.
But, as we have already seen, the forms of existence of money can be different.
Therefore, in theory, monetary aggregates are numbered from m0 to m3.
Each of these figures shows exactly what set of possible forms of existence of money is meant.
Important note.
The monetary aggregate, which shows the amount of money available in the country, is a purely practical tool that is managed by central banks.
Since the monetary system in each country is still different from each other, each central bank formulates these concepts in its own way.
In general - the same, but in the details - there are differences.
Monetary aggregate m0 - "cash".
You can touch them and even put them in your pocket.
Monetary aggregate M1 - funds on accounts, bank checks and deposits "on demand" are added to the monetary aggregate M0 money.
This is something that can be turned into money almost instantly, without effort.
Withdraw money from the account,
get it from an ATM,
present a bank check for payment at the cash desk of the bank.
Receive a demand deposit at the bank's cash desk.
The m2 monetary aggregate is the most interesting for the central bank of any country. (That's why they're different)
It includes deposits.
The fact is that the deposit can be withdrawn from the bank by breaking the contract.
That is why central banks carefully monitor the size of the monetary aggregate m2, this allows them to manage inflationary processes.
Views on the m3 monetary aggregate differ in different countries, but, on average, banking metals and securities issued by banks are added there.
Of course, with the exception of stocks.
