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-Money, Money, Money-
Lesson 74 – Money, Money, Money
The money created by banks isn’t the paper money that we receive from the cash machine and hand over to the shopkeeper. The Central Bank cash makes up only 3% of existing money. The other 97% is what flashes up on the cash machine screen when you check your balance. Banks are allowed to create money in order to dispense loans, mortgages etc. and is simply an IOU from your bank to you. In this technological, internet age many of us use internet banking to arrange our affairs, pay our bills etc. E-commerce sales are growing by more than 19% every year and could reach a staggering $1.4 trillion by 2015, with over 50% of the population of the U.S. internet shopping regularly.
This means that you will likely handle a small percentage of the money you earn with the rest being passed digitally from company to company. This digital cash can effectively create a substitute for actual money which, in theory, sounds like a safe, secure and efficient system. However, to understand the implications of a paper money free world we should take a look at how the central bank created money and how the high street banks once earned their profit.
Let’s say, for example, the central bank creates a €10 note. The cost of producing such a note may be €2. A high street bank would anticipate a demand for cash from their customers and purchase notes from the central bank. These notes were bought for their face value €10 for €10. The high street bank would then loan the money out to their customers and charge interest. This interest earned would be the profits gained by the bank. In the meantime, the central bank would take €2 from the money paid to them by the high street bank and use that to create more money, the excess €8 would be used to help fund health care, education and other council services, keeping taxes down.
Now, when a customer approaches a high street bank and makes a claim for a loan, the bank does not have to give the customer actual money, rather, it creates a deposit account to the amount the customer wishes to lend. For each loan that a bank makes in this way creates new money. In a report made by the Bank of England is was stated:
“Commercial 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.”
Commercial banks do not have to pay anything towards council services and so the lessening demand for “actual” money means that taxes are raised in order to keep up with public demand for such services. Where funding isn’t generated to pay for these services, there must be cuts.
Before 1844, only the government was legally allowed to create metal coins. Rather than people carrying around all these coins they would deposit them with a jeweller or a goldsmith who would in turn give the customer a piece of paper stating the value of the coins deposited. For security, the shopkeeper would take the coins to a trusted bank. Eventually, most shopkeepers would simply accept the paper receipts as payment, saving the customer the effort of depositing and withdrawing constantly.
As a result, only a small percentage of deposits were ever withdrawn. Noticing this, the shopkeepers realised that they could lend out the remainder of the money and charge interest. Thus earning themselves a profit. Further to this, being that many shops would now accept the paper receipts, the goldsmiths and jewellers were able to give borrowers said receipts rather than the coins. Even if the shopkeeper had only 1,000 pounds in the vault, they could now lend out much more.
The power to create a substitute for “actual” money was borne and banks were allowed to create money from nowhere.
Interactive Video Comprehension Quiz 1:
Summary Statements Comprehension Quiz 2:
Drag and Drop Quiz 3:
I had my hair cut yesterday. (no matter who did it)
We will have our car repaired next week by a friend of our. (the by-agent can be left out as well)
You should get the roof fixed before it rains again.
He is supposed to go to school every day (instead of ditching classes all week).
I am ill so my mother told me that I have to go to the doctor.
They had to wash up the dishes because their dishwasher was broken.
You must text me as soon as you have got your results.
You can’t eat that apple. It is already rotten.
They mustn’t play on the street, it is too dangerous.
She didn’t let me go out with my friends when I was younger.
If I receive a bad mark in my final exam I won’t be allowed to take a year off.
His parents didn’t allow him to keep going to his football training.
They can see each other on the weekend if they want to.
She let him drink the beer that she could not finish.
You are only allowed to smoke in the smoking area over there.
Could you pass me the salt, please.
May I take this chair, please?
You don’t have to do the washing up now, we will do it later.
They don’t need to learn all the vocabulary, it is too much for them.
You needn’t work tomorrow. It’s a bank holiday.
100, 1 000 or 1 000 000 only exist in a singular form. (Unless used in expressions such as: “thousands of fans came to the concert”, “millions of singles were sold in the first few months of its release”)
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