Q. Are there other ways to create money?


User artp posted this question in the forum and now it’s being republished here.

As I read (mostly in The Economist) about the current economic crisis the more I become convinced it is partly a breakdown in the way our economy creates money. This leads to the question: Are there other ways to create money?

As most people who have studied economics know, or should know, when the banks make a loan they create money and when the loan is repaid the money disappears but is recreated when the money is reloaned. Further when the central bank purchases government bonds (or other debt) this too creates money. But this is called high-powered money because it is subject to a multipier as it works its way through the banking system. The multiplier depends on the ratio of reserves than banks are required or decide to keep to protect against losses or runs on the bank.

When banks have to write off loans this reduces the money supply. The same applies when they decide to increase the percentage of reserves they keep. The result is a decrease in the money supply which is required to facilitate the exchange of goods and service. People are now calling it a credit crunch.

Are there other ways to create money?

One way is the local exchanged trading system (LETS) where people earn credits by providing goods or services to others in a group. I think these credits serve the same purpose as national money supplies which are mostly computer entries. An interesting feature of the LETS system is that it creates money upon which no interest is charged. A not so interesting feature is that every transaction is recorded. A national LETS system would be a big step towards 1984.

Another possibility is to incorporate money creation into a scheme to give subsidies to consumers rather than producers possibly in the form of a guaranteed annual income.

It appears the current way our economy creates money has broken down. Thus could be worth looking for other ways to create money.

6 responses to “Q. Are there other ways to create money?”

  1. Where do we go from here? Well let us step into the future.
    The National Debt now matches the GDP and there are over $100 Trillion in unfunded mandates which would require taking all of the commercial activity in the U. S. for the next 7.2 years. Economically, with our present monetary system the historical result will be inflation, but this wont work on the unfunded mandates as they will increase at the same rate as inflation, and banks will increase interest to offset their loss on long term loans.
    If you analyze the monetary structure and the interaction of money to the market the result leads to a discovery that private money creation by banks is unnecessary and is the cause of all of our 20th Century financial crises. Banks are no longer the repositories for safeguarding wealth; they are the handlers of created credit. The simple solution is to remove the ability of a private bank or financial institution to use fractional banking in money expansion. Sounds like a nutty suggestion, but this will occur at sometime in the future and will be the future financial structure. Banks are no longer necessary; they are a detrimental factor to and a financial burden on the citizens. Banks create the principal they loan to borrowers using fractional banking which allows them to lend 90% more than they actually have on deposit. The borrower is charged interest on this nonexistent created money along with the bank charges. When the principal is repaid the created nonexistent money no longer exists. All of the money the borrower paid on the loan is now removed from the money supply. Creating money should be the duty of the Government and should use the returning payments of principal to pay the costs of Government. If this were the monetary structure at this time the financial crisis would never have occurred nor would income tax or interest exist.
    If we would convert to this system the un-payable unfunded mandates could be easily covered with the surplus from the reduced cost of government. The excess wealth would now be in the hands of the citizen rather than the banks and the government.
    Using this method the expendable income of the U. S. citizen would exceed $3.5 Trillion dollars a year. If we stay with the present system the debt will stop our progress.

  2. well if thats what is caused the slump, how sure are we that the recreated money will be used in a much more sensible manner so as not to seek more avenues of creating more money. in my opinion we really need to start thinking about how we use the money at our disposal. because even if we were to create more money and its also miss used then we follow the earlier trend then when will we stop creating. i think people need to check their money usage o as to create more than misusing it in pretense of agitating for more money because if we do so we shall only create a cycle which we shall never stop

  3. That’s the problem with today’s economic system, they try to create money not value. If economics is the satisfaction of human wants, all we need to do is: Manage the human resource to utilize the environmental resouce to produce the requirement of the human, scientifically!

  4. Money is an artificial commodity. It is created to make it easier than bartering to trade goods. But money has no intrinsic value so it must be given value by establishing a fixed exchange rate (i.e. price fixing) with a real commodity. The gold standard is a good example but any commodity can be used to back a currency. No one currency has both the stability and elasticity to keep up with the growth fluctuations of entire economies so, it makes sense to allow for multiple private currencies. As long as private banks that publish private currencies are federally verified to posses 100% of the reserves needed to back their currencies, there is no arbitrary inflation; no boom and bust cycles. That is how money should work.

    1. Giving the private banks more power is the cause of the financial crises, and you suggest turning it up a notch by giving them their own currencies? I’m not entirely sure what exactly you mean by that, but an obligation in the private bank you refer to is going to be as stable as that currency. Apparently not very stable at all.

      No single commodity can be tied to the currency, getting rid of the gold standard was absolutely necessary. Now money represents everything; houses, bread, computers, factories, everything. These things provide the world a lot more value than gold. King Midas wasn’t all that happy after his wish came true.

  5. Its hard to find money, bu its easy to spent money.

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