Money is created by banks and loans

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92% of all money exist inside computers

Since money is really just a representation of value, it didn't take long for people to realize they could just send information about money by telegraph or other electronic means, and it was just as "real" as sending the money itself.

Amazing facts about computers..

Did you know that only 8% of the world’s currency is physical money? The rest only exists on computers!

After World War II, banks would record information about the day's transactions onto large magnetic reels, which were taken to the regional Federal Reserve Bank. This system eliminated the need for the large denominations that were printed prior to the war to facilitate these large-scale transfers. Today, the $500, $1,000, $5,000, and $10,000 bills printed during this period are very rare, though some are still in circulation.

Later, wire connections were established between the banks, so the transfer information could be sent directly.

By the early 1990s, all transfers between banks and the Federal Reserve were done electronically.

There are three other important steps in the history of electronic money:

*   Diners Club issued the first credit card in 1950. At first, credit cards were considered a special perk available mostly to rich businessmen. As soon as banks realized there were billions of dollars to be made by issuing credit to as many people as possible, credit cards exploded. Today's largest credit card company, Visa, started out as the Bank of America, and issued the Bank Americard in 1958. Today, there are over 200 million Visa cards in use in the United States alone.

*   The Social Security Administration first offered automatic electronic deposit of money into bank accounts in 1975. Once people became comfortable with the concept of money being added to their accounts without ever holding the cash, the practice spread. People started paying bills, transferring money between accounts, and sending money electronically.

*   The growing worldwide acceptance of the Internet has made electronic currency more important than ever before. Purchases can be made through a Web site, with the funds drawn out of an Internet bank account, where the money was originally deposited electronically. People are earning and spending cash without ever touching it. In fact, economists estimate that only 8 percent of the world's currency exists as physical cash. The rest exists only on a computer hard drive, in electronic bank accounts around the world.

online money

Where did the terms for money we use today originate from?

Many of the words we associate with money today come from ancient uses of currency. Examining where these words came from helps us understand how currency systems developed.

  • Buck- Early settlers in North America relied heavily on the skin of the deer for trade. Each skin was referred to as a buck.
  • Pecuniary- This modern word means, "relating to money." It comes from the Latin word pecus, which means cattle.
  • Fee- This word comes from the German word for cattle, vieh.
  • Shell out- The use of shells as currency among Native Americans, and, later, the European colonists, led to the phrase "shell out," meaning "to pay."
  • Salary- This is another money-related word we got from the Romans. At one point, Roman soldiers were paid part of their wages in salt. The Latin word salarium means "of salt."
  • Dollar- A count in a Czechoslovakian town called Jachymov started minting silver coins in 1519. The coins were known as talergroschen, which was eventually shortened to talers. They spread throughout Europe, and today, many nations have currency named for some variation of the word taler, including the American "dollar.

Most of the money in our economy is created by banks

In the form of bank deposits – the numbers that appear in your account. Banks create new money whenever they make loans. 97% of the money in the economy today is created by banks, whilst just 3% is created by the government.

The money that banks create isn’t the paper money that bears the logo of the government-owned Bank of England. It’s the electronic deposit money that flashes up on the screen when you check your balance at an ATM. Right now, this money (bank deposits) makes up over 97% of all the money in the economy. Only 3% of money is still in that old-fashioned form of cash that you can touch.

Banks can create money through the accounting they use when they make loans. The numbers that you see when you check your account balance are just accounting entries in the banks’ computers. These numbers are a ‘liability’ or IOU from your bank to you. But by using your debit card or internet banking, you can spend these IOUs as though they were the same as £10 notes. By creating these electronic IOUs, banks can effectively create a substitute for money.

Every new loan that a bank makes creates new money. While this is often hard to believe at first, it’s common knowledge to the people that manage the banking system. In March 2014, the Bank of England release a report called “Money Creation in the Modern Economy”, where they stated that:

“Commercial [i.e. high-street] banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.” (Original paper here)

By creating money in this way, banks have increased the amount of money in the economy by an average of 11.5% a year over the last 40 years. This has pushed up the prices of houses and priced out an entire generation.

Of course, the flip-side to this creation of money is that with every new loan comes a new debt. This is the source of our mountain of personal debt: not borrowing from someone else’s life savings, but money that was created out of nothing by banks. Eventually the debt burden became too high, resulting in the wave of defaults that triggered the financial crisis.