money

liquidity-trap-ms-demand-for-money

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 the economy grows. The money supply measures the stock of money in the economy.A narrow definition of money (M0) includes the stock of notes/coins and operational deposits at Bank of England A broad definition of money (M4) is notes and coins + deposits in bank accounts + other liquid assets. Ways to increase the money supplyPrint more money…

Money Multiplier and Reserve Ratio

Money Multiplier and Reserve Ratio

The Money Multiplier refers to how an initial deposit can lead to a bigger final increase in the total money supply. For example, if the commercial banks gain deposits of £1 million and this leads to a final money supply of £10 million. The money multiplier is 10. The money multiplier is a key element of the fractional banking system.There is an initial increase in bank deposits (monetary base) The bank holds a fraction of this deposit in reserves and then…

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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…

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…