This physical money is a tiny fraction of the economy, and
in many economies, this kind of money only makes up about 3-8%. This physical
money is created in order to meet the obligations of private banks. When you go
to an ATM and try to withdraw cash, banks need to make sure that they have
enough cash in order to meet those obligations. So let's take a $10 note for
example. It costs approximately 3 cents in order to print this note. This means
that there's approximately $9.97 of profit for creating a $10 note. This $9.97
can now be added to tax revenue of the government. This revenue is called
seniorage. so since the government makes profit from printing and minting coins
and can reduce the amount of taxation on the public you might be thinking why
don't governments just always print physical money the main reason that
governments don't create the majority of money is because of politicians if the
politician running the office could create money at will there would be a
massive conflict of interest there would be an urge to keep printing to fulfill
campaign promises or fund wars this would in theory
destroy the currency by excessive printing, causing massive
devaluation. The more money you have in circulation, the less it's worth. And
that's a key point. For example, if massive inflation takes place, and the
average Joe has a million dollars, but that million dollars only buys an apple,
how much is a million dollars actually worth? The loss in purchasing power of
money over time is called inflation, and when inflation gets out of hand, money
becomes worthless. Some recent examples of runaway inflation include Argentina,
Zimbabwe and Venezuela. In this animation you can graphically see just how fast
inflation can run away. You don't see it coming and as the inflation rate goes
up people quickly lose faith in the currency. For example, here we can see some
people in Venezuela using money to make handbags and to draw pictures on
because
It simply isn't worth anything anymore. You can think of
money as a measuring stick of value, a measuring stick that is highly elastic
and can change depending on how much of it there is. For thousands of years,
gold was the measuring stick of value. Gold was kind of like a physical anchor
keeping the money supply in check and governments responsible. In 1971,
President Richard Nixon announced that the United States would no longer
convert dollars to gold at a fixed value. Since that point, money, the
measuring stick of value, has become elastic. Since the US dollar backs all
other currencies as a reserve currency, Nixon's decision changed the world. In
all of this, you might still notice that despite politicians supposedly not
being able to influence money creation, it's happening anyway.
This may cause problems as we'll see later in the episode.
So to recap, the government creates physical forms of money, like notes and coins.
Only about 3-8% of money is made this way. Signerage is the income from that
physical money. This income is both a benefit to the government and the
taxpayer. It reduces debt for the government and reduces the burden on the
individual taxpayer. The reason governments don't create more of this money is
because of the inflation risk from politicians' decisions. Let's move on to
number two, private banks and debt-based money. The vast amount of money
created today is done by the private banking sector. In most developed
economies, about 97% of the entire money supply is created digitally by banks,
and therefore most money in the world is privatised.
Banks invented digital money when they managed to persuade
lawmakers after many early bank runs. A bank run is an event where depositors
try to get their money out all at once, but the banks don't have it. From these
events, banks argued that they should be legally allowed to create more
deposits than actually exist based upon debt. And this is how governments outsourced
the creation of digital money. The idea of using debt as money begins much
earlier than this. English innovators set the stage for banks to become the
creators of money across the globe. In 1704, the English Parliament passed the
Promissory Notes Act. take a good look at your screen. What you are seeing is a
promissory note. In this case, it's a written promise to say that you'll pay
back the $20 you borrowed.
