Chapter 26

Money fascinates nearly everyone! Even so, most people, including bankers, do not understand how money is created. In particular, the process by which banks create money is a mystery to virtually everyone. Fortunately, the textbook has a very clear description of the process of how banks create money. Members of the public so frequently do not understand this process, so I want to be sure that you have a firm grasp of it. We'll work through an example that deals with Art and Amy, Barb and Bob, and others.

The process begins when Art decides to keep $100,000 less in currency on hand by depositing the currency in his chequing account at his bank. (With this kind of money at hand, Art obviously was an economics major in college.) The figure shows that Art's bank gains an additional $100,000 of deposits and an additional $100,000 of reserves.

This deposit is far from the end of the story. To see the next part of the story, click on the figure below.