Money has several uses, in society. You might want to start by explaining what m

Question

Money has several uses, in society. You might want to start by explaining what money does for us. Could we live without physical (cash) money?

The banking system creates the money in the US ( the few physical bills are just receipts for bank reserves. Banks create money by lending, called the fractional reserve system.

Please describe the process by which banks use our deposits to create money. Be sure to work the reserve requirement into your posts, and explain the deposit expansion process, and how the reserve requirement limits the amount of money. Do we have more money that there really is? Would we have less without deposit expansion ?

Explanation / Answer

MONEY IS USED BY ALL OF US FOR PERFORMING TRANSACTIONS WITH CASH OTHER FROM BUYING GASOLINE, TO FOOD SUPPLIES AT GROCERY STORE , PAYING BILLS AT HOSPITAL AND MANY MORE TRANSACTIONS. THIS ACTIVITY OR COMMERCE IS DONE BY EXCHANGING CURRENCY. MONEY IF WE SEE IS THE LIFEBLOOD OF THE FINANCE SYSTEM. HOWEVER NOWADAYS WE SEE THAT MOST OF THE PEOPLE CARRY A DEBIT OR CREDIT CARD WHICH WE CALL PLASTIC MONEY. THE PLASTIC MONEY HAS TAKEN THE HARD CURRENCY OUT OF BUSINESS BY A HUGE NUMBER. NOW MOST OF THE PEOPLE AND ORGANIZATIONS MAKE USE OF PLASTIC MONEY FOR TRANSACTIONS. SEVERAL COUNTRIES HAVE EVEN STARTED TO TAKE AWAY THE HARD CURRENCY OUT OF BUSINESS. LIKE IN DENMARK THE PEOPLE HAVE STARTED USING ELECTRONIC PAYMENT SYSTEM A LOT.

THE HARD CURRENCY HAVE MANY PROBLEMS ALSO ASSOCIATED WITH IT. THE FIRST THING IS THAT THE LIFE OF PAPER CURRENCY IS RESTRICTED TO FEW YEARS ONLY. THE COINS HAVE LONGER LIFE BUT THEIR PRODUCTION COSTS ARE MORE THEN THERE VALUE. TRANSPORTATION OF CURRENCY IS ALSO A COSTLY AFFAIR. SOILED NOTES ARE DESTROYED IN HUGE NUMBERS EVERY YEAR CREATING EXTRA COSTS OF DESTRUCTION. AGAIN PAPER CURRENCY IS UNHEALTHY ALSO CARRYING A LARGE NUMBER OF BACTERIA ON ITS FACE. BUT STILL WE NEED PAPER CURRENCY IN SOME PLACES LIKE GROCERY STORES OR HOSPITALS. SO IT MIGHT STILL TAKE SOME TIME FOR PAPER CURRENCY TO VANISH.

THE BANKS PLAYS AN IMPORTANT ROLE BY CREATING MONEY SUPPLY. THIS IS DONE BY DEPOSIT EXPANSION PROCESS. SAY A PERSON RECEIVES A CERTAIN AMOUNT FROM A SOURCE AND DEPOSITS IT WITH THE BANK. THE BANK HAS TO KEEP SOME AMOUNT AS RESERVE WITH THE FED AND THE REST IT CAN GIVE OUT AS LOAN. THIS LOAN IS USED BY THE ANOTHER PARTY TO PAY SOMETHING, THE RECEIVER DEPOSITS IT WITH HIS BANK. AGAIN A PART OF IT IS KEPT AS RESERVE AND THE BALANCE IS GIVEN OUT AS LOAN AND THE CYCLE MOVES ON AS PER THE NUMBER OF MULTIPLIER IN THE ECONOMY. HOWEVER THE RESERVE REQUIREMENT MAKES IT POSSIBLE TO FINALLY BRING THE MULTIPLIER TO A HALT.

HENCE FROM ABOVE WE SEE THAT ALTHOUGH THE PHYSICAL CURRENCY IS THE SAME OR LESS DUE TO RESERVE BUT THE ON PAPER AMOUNT IN BANKS STATEMENTS SHOWS MORE THAN THE PAPER CURRENCY. THUS WE DO NOT HAVE MORE PAPER MONEY BUT WE HAVE MORE IN RECORDS. DEFINITELY WE DO NOT HAVE MORE MONEY UNTIL AND UNLESS THE EMERGENCY ARISES WHERE EVERY DEPOSITOR RUSHES TO HIS BANK TO WITHDRAW CASH AND THEN THERE MIGHT ARISE A SHORTAGE FOR PAPER CURRENCY. OTHERWISE WE DO NOT MORE MONEY THAN THE AMOUNT LEFT FROM THE FIRST DEPOSIT UNDER DEPOSIT EXPANSION PROCESS.

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