The creation of money – this is how it’s done
Money creation is the process where the economic activities of a country increases there by increasing the circulation and supply of money in the country. In many countries, money creation or money increase is seen through cash deposits.
Below are some of the ways used in the creation of money:
- Injecting reserves: This is where large sums of money are deposited into the reserves of the banking system, in this case the Reserve Bank. The role of the reserve bank in this case would be to achieve and maintain price stability in the interest of balanced and sustainable economic growth in South Africa. It also plays a pivotal role in ensuring financial stability.
- The credit market funnel: All the money belongs to the bank and chiefly the Reserve Bank. Banks lend money to people through loans, house bonds and other different investments criteria. It is through such transactions that banks make interests from its clients thereby making money.
- Money creation mechanism: The logic is that most reserves banks are no longer physically printing money but rather working with figures thereby becoming more technologically creative. Nowadays most companies are using checks, debit and credit cards, balance transfers and online transactions.
- When a bank makes a loan, it concurrently generates a corresponding deposit in the debtor’s bank account, thereby creating new money. Commercial banks generate money through bank deposits by making new loans. When a bank makes a loan for someone taking out a debt to buy a house, it does not give that person physical money but rather credits their bank account with a bank deposit of the size of the mortgage.