>>Are you serious? Of course the government controls the money supply!
>>Unless you have a really good color copier in your basement...
>Thanks for saving me the trouble of having to say this, Mark. :^)
Actually, most governments today control the money supply only
indirectly, by setting interest rates or changing bank reserve
requirements. NOT by printing more money (except in very exceptional
cases, as when the U.S. govt printed some $80 billion of cash in
response to the Y2K problem).
I realized this only recently, and I believe many SANETeers may not be
aware of this: commercial banks create money, that is how they make so
much of it.
I've posed this question so many times, even to economists, and have
almost always gotten the wrong answer: ASSUMING A RESERVE REQUIREMENT
OF 10%, HOW MUCH ADDITIONAL MONEY CAN THE BANKING SYSTEM LEND, IF YOU
DEPOSIT 100 DOLLARS IN YOUR BANK?
If your answer is 90, which is what I also thought a year ago, you --
like almost everyone else -- are underestimating the power of banks.
The correct answer is 900. Please read that again: from your 100
dollar deposit, the banking system can lend a maximum of 900, not 90,
If the reserve requirement is 1% instead of 10%, then the banking
system can lend from your 100-dollar deposit and total of $9,900. (And
not $99, which is the most common answer.)
Until one appreciates why this is so, one has not learned how banks
really MAKE money.
PS. This is also the reason why the banking system is SO SCARED about
deposit withdrawals due to Y2K fears.
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