money

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Printing Money and Effect on Sterling

Readers Question: I understand that if a government were to print more money and circulate it into its own economy, that this would inevitably lead to increased inflation in its country. Sound argument for not printing more money. But why would a country not print more money to purchase from other countries (e.g. to repay debt or to purchase raw materials). Wouldn’t the extra money then simply be dumped into the other country, leading to higher inflation in that country and not your own? Or perhaps is the answer that…

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Money Explained

I think that Niall Ferguson’s book and series – The Ascent of Money makes a good read and also helps to explain some of the mystifying aspects of money. There is a humorous video here – explaining money with Niall Ferguson and Stephen Colbert asking ‘Am I money ?’ What is Money? Money is an object used as a medium of exchange between two parties. It can have intrinsic value like gold or it can be a universally accepted instrument such as notes and coins printed by a Central…

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Increasing Money Supply

Readers Question: I’d like to ask you about routine ways (apart from so called “printing new money”) by which the total volume of money in economy grows. Governments or central banks “print new money” apparently only rarely, but given the fact of almost persistent inflation throughout decades, the total volume of money in the economy must grow persistently and significantly anyway. If a central bank lends money, does it (in normal circumstances) always only turn the central bank’s cash into central bank’s (loan) debtors? Is it really absolutely unusual that by…

Banks and The Creation of Money

Banks and The Creation of Money

Readers Question: Is it right that private banks can create 97% of all new money by lending it into existence, and what effect does this have on inflation and the value of money already in existence ? It is true, that banks can effectively increase the money supply, by lending out say 97% of all deposits. Example of How Banks can Create Money If you deposit £1,000 in the bank. The bank has £1,000 extra deposits (assets). Out of this £1,000 the bank may keep only a reserve of 3% (£30). This means they…

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£10 History of Money

What happens if I take a £10 to the Bank of England? If you look at a British £10 note, it says “I promise to pay the bearer on demand the sum of ten pounds” Therefore, if the Bank of England is true to its word, you should be able to go to Threadneedle street and demand the value of ten pounds in Gold. Of course, a ten pound note, has no intrinsic value. It is used to merely act as a medium of exchange. There was a time when the…

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Money Multiplier and Reserve Ratio

Readers Question: Why is the money multiplier in the US smaller then the inverse of the required reserve ratio? Help (note: not on UK A Levels – my British readers may be relieved to know) The Money Multiplier refers to the amount that commercial banks can increase the supply of money in an economy. This is calculated by:  Increase in money supply / Increase in monetary base that caused it For example, if the commercial banks gain deposits of £1 million and this leads to a final money supply of £10 million….