Ignorance about how money is created

Sometimes I wonder if central bankers have a conspiracy to keep us ignorant of how money is created in our economy.

They use expressions like adding to their balance sheets, credit in the economy or quantitative easing all of which relate to increasing the money supply.

When  central banks buy government bonds on the market or from the government they create money for the purchase and add the amount to their balance sheet.  This new money injected into the economy is called high-powered money and thanks to fractional reserve banking the amount is increased by a multiplier.

For an explanation of how money is created and some of the problems associated with this process, please look at my essay LETS go to market: Dealing with the financial crisis.

The U.S. Federal Reserve Board has been  criticized for not injecting high powered money into the economy early in the crisis of the 1930s.  Once this process was started the economy started to pick up.

But things are different today.  It appears bank lending and business spending is limited not by a lack of high-powered money but rather by a lack of opportunities.

In any case, money is such an important part of our economy that it would be good if a few more people than central bankers understood how  it is created.  It may take a little thinking out but I believe most of us should be able to understand the process.  An afterthought: maybe central bankers use these terms because they don’t understand how money is created.

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One Response

  1. All is explained on the website http://www.positivemoney.org.uk and even better in the new book, “Where Does Money Come From?” that can be ordered on that website.

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