Creating Credit

How did the first people created the credit? Previously we have discussed how the medieval goldsmiths soon realized that they do not have to confine all the money saved with them. They simply keep a small part and lend the rest. So is the modern bank in the modern economy. If you find a stack of paper money is still good and worth a thousand new dollars invested in a chest in the backyard by his aunt Matilda. You take it to your bank,
Do you think the bank will keep it carefully until one day you come back to ask for it back? If so, you do not know much about banking. Your bank has been long known that if he took 10 percent or even 5 percent of it and its customers money in the cash drawer, he'll have enough money to handle the day-to-day withdrawal.

The bank can lend the rest of the money and take advantage by appointment. If an hour and a half you save your money and go, a farmer walked in and asked to see the manger. He explained that he needed loan money to be able to buy seed to plant wheat. He promised to pay back the loan with interest after  harvest . Your bank manager might say, Thank God the father came here this morning.  Accident  we just reserve the arrival of a customer who told us a thousand dollars. He will not take back more than $ 100. - In the near future, so we can lend it to you $ 900, - (Of course he would not say exactly so, but the principle is so.)

Now consider this situation. You have saved a thousand dollars in the bank. With your checkbook, you act like people who have money one thousand dollars in his pocket. You are free to spend it if there is anything in particular that attracted you. But the pack farmers to borrow money just as much as $ 900, - for him. He is also valid as those who have some money in his pocket. Most of the money you're doing obligations doubled.

It's also not the end of this affair, I wish the farmer had to spend $ 900, - all in one purchase of seed merchants. Now the farmer disappears from our story, but the seed sellers come in and pay the money into his bank account. His bank is now $ 900 richer, -. All it takes is just one other bank that comes to finding a loan .. "Of course ma'am, we happen to be able to lend you $ 810, -" net addition to the money stock is 1000 + 900 + 810 ...

And so the story continues. By the time you borrowed money, borrowed more, [the money] was going to swell to ten times the size of the instance. (If you are a mathematician, you will recognize this as the principle of geometric progression, but it does not matter if you do not know her pa. You do not have to be a genius to learn the simple math required to be a basic understanding of economics.)

The way banks create money through lending of this kind is known as the principle of doubling of credit (credit multiplier). This principle explains why, if the government wants to control the money in a country, not enough to just simply refuse to spend more paper money and coins. The Government must also prevent banks lending money. At the upcoming posts we will discuss about this.

Thus this post, please write about and more in the comments.