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The Banking System and Money Creation

24 April, 2015 - 11:52

Learning Objectives

  • Explain what banks are, what their balance sheets look like, and what is meant by a fractional reserve banking system.
  • Describe the process of money creation (destruction), using the concept of the deposit multiplier.
  • Describe how and why banks are regulated and insured.

Where does money come from? How is its quantity increased or decreased? The answer to these questions suggests that money has an almost magical quality: money is created by banks when they issue loans. In effect, money is created by the stroke of a pen or the click of a computer key.

We will begin by examining the operation of banks and the banking system. We will find that, like money itself, the nature of banking is experiencing rapid change.