The process by which central banks or countries create money is so simple that popular belief tends to resist believing it. The answer of money’s origin question might seem as simple as a machine producing banknote in mass, because that’s the case. But remember, there is only between 5 and 10 % of money supply circulating in this form, the rest of it is electronic money.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford.
All the money on earth doesn’t really exist !
The reason behind it is of practical order. If you’ll never receive your salary in cash, just because it’s more convenient this way; the same goes bank transfers; they’re computerized more and more. Thanks to the invention of credit card, you’re able to pay a restaurant bill by debiting a certain amount of money on your account and crediting it to restaurant’s one. And yet, no banknote has passed from one hand to another, only computer entries have changed.
If everyone would withdraw all of their money, the whole economic system as we know it would collapse immediately. Why ? Check again the title of this paragraph.
The paper money is created and printed by a government agency. But the 90% and few remaining are coming from very large private entities, companies you all know …
The banks !
The money they lend doesn’t come from their profits, from their depositor’s money. All of it comes from the promises of repayment made by their borrowers. Each time a bank makes a loan, a new bank credit is granted.
Moreover, the laws allow banks to create and pretend to having more money than they actually have. It’s called “reserve requirement ratio”. The ratio fluctuates depending on where you are in the world. It goes from nothing (e.g. Canada, Australia, UK, etc…) to 30% (Lebanon). It’s usually about 8%, which mean with 8 units of a currency (€, £, $, etc…) they can lend a hundred.
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