What is money, two types of money

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What is money?

Money rules the world; that is an indisputable fact. Money, money, money… We either own it or spend our whole lives looking for it. But what exactly is money, and where does it come from?

Two types of money

Every modern economy is based on the money with forced circulation, so-called fiat money, issued by central banks. It has no value because the paper used to make it is practically worthless. Fiat currency is used in exchange for services or goods because people simply trust the central bank to maintain its stable value. However, should central banks fail, fiat money would cease to function as a medium of exchange and lose its appeal as a store of value.

There are two types of money in every modern economy – paper money and electronic money, one of the most frequently used today. There is probably no need to explain why this is the case. Paying with electronic money is simply more convenient. And what exactly is electronic money? It’s just a set of numbers you see in your bank account.

The difference between paper and electronic money is insignificant or even non-existent. For example, when you buy a TV at an electronics store, it doesn’t matter if you pay for it in cash or with your credit card. The price of the goods would not change and would remain the same. In this case, it is only a matter of comfort or preference.

The emergence of money

A noticeable difference between paper and electronic money only appears at the moment of their creation. National central banks issue paper money in paper notes or coins. Do you also think that central banks spend most of our money? No. Money issued by central banks represents only 3-5% of the total money supply.

The rest belongs to electronic money created by commercial banks. If you think electronic money is just an electronic version of paper money, you are wrong. Electronic money is created by commercial banks when these banks issue loans. However, the notion that thousands and hundreds of thousands of petty savers have put this money into the bank, and the bank is now using it is wrong. The bank simply creates a certain amount out of the air and adds it to the total money supply in the given economy. And that is how 95-97% of the total money supply is created.

Conclusion

It is a horrible idea to let banks, private institutions, create money and control it. The only entity benefitting from this system are the banks themselves. They can cancel ATMs, do not have to hire new people, or purchase cash-transfer vehicles. The result is lower bank costs and incredibly huge profits.

Many people today still believe that banks lend money to their depositors. However, this is not the case. The fact that banks make money out of nothing has been confirmed, for example, by the Bank of England:

“Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage.”

And this simple spell creates wholly new money.

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