1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
kap26 [50]
3 years ago
14

Explain how banks are given the right to create money by the USA Government. In what form does the money take?

History
1 answer:
Gala2k [10]3 years ago
3 0

Answer:

are intertwined. It is not just that most money is in the form of bank accounts. The banking system can literally create money through the process of making loans. Let’s see how.

Start with a hypothetical bank called Singleton Bank. The bank has $10 million in deposits. The T-account balance sheet for Singleton Bank, when it holds all of the deposits in its vaults, is shown in Figure 1. At this stage, Singleton Bank is simply storing money for depositors; it is not using these deposits to make loans, so it cannot pay its depositors interest either.

The assets are reserves ($10 million). The liabilities + net worth are deposits ($10 million).

Figure 1. Singleton Bank’s Balance Sheet: Receives $10 million in Deposits.

Singleton Bank is required by the Federal Reserve to keep 10% of total deposits, or  $1 million, on reserve to cover withdrawals. It will loan out the remaining $9 million. By loaning out the $9 million and charging interest, it will be able to make interest payments to depositors and earn interest income for Singleton Bank and make interest payments to depositors (for now, we will keep it simple and not put interest income on the balance sheet). Instead of becoming just a storage place for deposits, Singleton Bank can become a financial intermediary between savers and borrowers.

This change in business plan alters Singleton Bank’s balance sheet, as shown in Figure 2. Singleton’s assets have changed; it now has $1 million in reserves and a loan to Hank’s Auto Supply of $9 million. The bank still has $10 million in deposits.

The assets are reserves ($1 million) and loan to hank’s auto supply ($9 million). The liabilities + net worth are deposits ($10 million).

Figure 2. Singleton Bank’s Balance Sheet: 10% Reserves, One Round of Loans

Singleton Bank lends $9 million to Hank’s Auto Supply. The bank records this loan by making an entry on the balance sheet to indicate that a loan has been made. This loan is an asset, because it will generate interest income for the bank. Of course, the loan officer is not going to let Hank walk out of the bank with $9 million in cash. The bank issues Hank’s Auto Supply a cashier’s check for the $9 million. Hank deposits the loan in his regular checking account with First National. The deposits at First National rise by $9 million and its reserves also rise by $9 million, as Figure 3 shows. First National must hold 10% of additional deposits as required reserves but is free to loan out the rest.

The assets are reserves (+ $9 million). The liabilities + net worth are deposits (+ $9 million).

Figure 3. First National Bank’s Balance Sheet: Required 10% Reserves

Since the loan to Hank was deposited into a demand deposit account (Hank’s checking account), the loan increases the M1 money supply. Making loans that are deposited into a demand deposit account increases the M1 money supply. Remember the definition of M1 includes checkable

Explanation:

Because all currencies are fiat currencies, which means they are NOT backed by gold & silver. This allows private banks to create money out of thin air and lend it to governments. This is the root of inflation and the recent financial crisis.

If you think about the following: 2,000 years in Ancient Rome you could walk into a clothes store and with a one ounce gold coin you could buy yourself a nice robe, sandals, etc. and get well dressed for one gold coin. Today you walk into a department store in NYC, London, Milan or Tokyo and with a one ounce gold coin you can buy yourself a suit, shirt, tie, socks, shoes & belt. The value of a one ounce gold coin today in just over USD$1,700. Interesting to see that a gold coin 2,000 years ago buys you the same today.

If you look into monetary history you'll find that every time currencies were backed by gold & silver there was no inflation and economy thrived. The sooner we go back to this system, the sooner the economy will sort itself out.

The good thing is that the Swiss government are going to have circulate Swiss Franc gold coins as an alternative currency to the paper money Swiss France in Autumn this year. In Utah, USA a silver coin currency is already circulating as an alternative to the US dollar, 12 other US states are about to follow. Also the Mexican government is about to approve the circulation of silver coins as an alternative to the peso. So it's already coming...

You might be interested in
HELP FAST PLEASE!!!!!
charle [14.2K]

C i think (8,4) (x,y)

                 

7 0
3 years ago
Can someone help me
Licemer1 [7]
Education reform lead by Horace Mann was a major reform movement in the early 1800's. He helped create mandatory public education for all in the United States.
6 0
3 years ago
Who wanted to expand the nations territory in Europe in world war I
Grace [21]
The ones that wanted to expand were Great Britian, France, Germany
5 0
3 years ago
Read 2 more answers
The Founding Fathers chose to ensure against a ruler with absolute authority by —
julsineya [31]

Answer:

becuase of what king george did to the colinist

or

making 3 houses with checks and balances so one house could not get more power than the other?

Explanation:

5 0
3 years ago
Why did the turmoil of the French revolutionary years result in a conservative European reaction?
frutty [35]
The reason why <span>the turmoil of the French revolutionary years resulted in a conservative European reaction was because the voices of "liberty" during the Revolution quickly devolved into movements of terror, which did away with practically all of the liberty that was gained. </span>
4 0
3 years ago
Other questions:
  • Please help, 12 Points! Hurry!
    13·2 answers
  • What kind of document is the Athenian Constitution?What was its purpose?
    15·1 answer
  • Why were asian spices in the 1300s so expensive by the time they reached Europe
    11·1 answer
  • What is the main function of a political action committee? A. raising social awareness on an issue B. encouraging the youth to g
    5·1 answer
  • PLLZZ HELPP FASSTTTT!!!!!!! 50 POINTS!!!!!!!!!!IF YOU DONT ANSWER CORRECTLY OR DONT EXPLAIN, I WILL REPORT YOU!!!!!im marking <a
    8·2 answers
  • Napoleon named himself all of the following, except
    14·1 answer
  • Which of the following statements best explains why people in Latin America first began to practice Christianity?
    12·1 answer
  • Definition for Censorship
    13·2 answers
  • What visual metaphors are used in Sources C and F, and which do you think is more effective?​
    15·1 answer
  • Complete the table with the main reason that each of these groups wanted the United States to stay out of war: Christian pacifis
    8·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!