There is a good chance you have wondered how the money you use is made. Even though it is obvious that the U.S. government printing presses print the money, the process is not as easy as you may think.
Typically, the Mint makes money depending on the demand. For instance, facilities in Washington, D.C., Fort Worth, and Texas can use approximately 18 tons of ink to print money worth $750 million in a single day. Moreover, the majority of new notes replace old notes that are in circulation.
Printed money only accounts for a small percentage of global money. Money that isn’t printed is infused into the economy by the federal government. Here is how money is made.
Virtual cash
Not all money is printed or tangible. For the economy to run, individuals must deposit money in their banks. The bank is responsible for creating money through the lending process.
Ever wondered what happens to your money when you deposit it in a bank? Usually, the bank deducts 10% of the total amount you deposit and holds it in reserve. The bank then uses the remaining amount to issue loans and make more money.
However, debtors must repay loans within the specified time for the lending process to be effective. As a result, banks will continue to create money. You can deposit your money with investment banks or commercial banks. The latter is ideal for large corporations and groups.
The problem when creating money
Since banks rely on the lending process to create money, commercial and investment banks approved loans for individuals looking to invest in the housing sector. People were confident that housing prices would continue to increase. Even investment banks predicted the same trend.
Unfortunately, housing prices didn’t perform as expected. Instead, the prices began to fall. As a result, most people who had borrowed money found it difficult to repay their loans. Investment banks had to file for bankruptcy or rely on the federal government for help. What followed is that banks that weren’t affected became reluctant when lending out money. The problem with using the lending process to create money is that people can borrow money and fail to repay. Consequently, banks won’t issue loans, which can affect the economy negatively.
What are the possible solutions?
At some point, people may fail to repay loans, which can negatively impact the economy. Fortunately, the Federal Reserve and central bank can make changes to impact the money-creation process. For instance, the Federal Reserve can dictate how much money banks can hold in their reserves to reduce or increase the loan amount. It can also encourage banks to purchase and sell treasury securities to achieve the same result. The Federal Reserve can purchase treasury bonds to reduce its interest rates.
Alternatively, governments and foreign investors can purchase U.S. Treasury bonds. Simply put, the government will be borrowing money from investors and other countries. It’s evident how money is made. Money doesn’t have to be printed. However, it is important to note that creating money through the lending process can reduce the American dollar’s value.
