Where Does Money Come from? Education continues to be the way to financial stability and success. We all want more money, but have you ever wondered how it is generated or created. Where does money come from? Here we will be exploring exactly where does money come from. Money can be divided into 2 categories, physical money that you can touch and electronic money.
By electronic money, we mean the balance that you see when you check your online banking or ATM. In the modern world, while we still use cash for some transactions, most times you never really see your physical money. It is moved when swiping your debit and credit cards. It has all the same buying and lending power as physical money. Where does the money come from? It’s just an incredibly efficient process in the background. Here we will be discussing where both physical money and electronic money come from.
Where Does Money Come From?
Here we will be talking about where does money come from and the physical currency i.e. bills and coins. Central banks generate or create money by printing it or purchasing bonds in the treasury market. The central bank buys UK treasury bonds from the banks that own the bonds. The money from the central banks is then passed to the various banks where they are utilized as loan-making capital.
Where Is Money Printed?
All banknotes for the United Kingdom are currently issued by the Bank of England and are printed in Debden, Essex.
How Is Money Printed?
We know that most people are fascinated with the printing process of physical money. This keen interest is fostered by the fact that there are so many secret procedures and security protocols that must be followed.
Here we will give you insight into,” how is money created” i.e. the printing process. It starts with the choice of paper. The paper is often a special blend with cotton and linen. However, many countries are switching to polymer notes.
The special paper is a security measure so that the paper cannot be easily reproduced. Counterfeit money is a common problem in many countries and countries try to guard against it by putting features that cannot be easily replicated.
The design of the note is also very important. Here is where special features are added to make the notes unique. Designs are usually tied to the history of the country. The design is then engraved on to the plates. There is a set of plates for each type of note, £1, £5, and so on.
Now that you have plates and paper, the printing can begin. One side is printed with the inks that are chosen and allowed to dry. And then the other side is printed. The printing takes place on large sheets of paper.
After this process has finished the serial numbers and seals are affixed onto the bills.
Lastly using a guillotine, the bills are cut, stacked, and packaged.
And that is how a batch of banknotes are created.
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When Was The First Paper Money Created?
Paper money or bills is not a new concept. In fact, it was first used by the Chinese. It was first produced during A.D. 618-907) when the Tang Dynasty reigned. It was first issued as a private form of credit or exchange note. It would be more than 500 years later that this practice would start in Europe around the 17th Century.
What Happens If Too Much Money Is Created?
If too much money is created or printed, it becomes useless. It can have a devastating effect on the economy. So governments cannot solve cash flow problems by simply printing more money. (some government have tried and paid the price in the past). Inflation occurs.
How Is Money Created?
Here we will describe the process of how the bank “makes” money. Checkable deposits are created by the banking system by lending excess reserves. Excess reserves are essentially capital reserves. They are held by financial institutions and are more than what is required by the different internal controls, regulators, and creditors.
Central banks set the standard reserve requirement amounts that are followed by the various commercial banks in the country. The Excess reserves are determined when they are measured against this standard. Money is created when the reserves are moved from bank to bank. This reserve is used for loans and newly created deposits.
Where Are Excess Reserves Stored?
They are usually stored in the bank’s vault under heavy security. Bank vaults are virtually impenetrable. They are built as part of the building and a combination is required to open it. A buddy system is used when entering the vault i.e bank employees usually go in pairs. So, no one is alone with all that money.
What Is The Required Reserve Ratio?
So as the name suggests, the required reserve ratio is the commercial bank’s deposit percentage that they are required to keep in cash by law. This ratio is set by the Central bank. The required reserve ratio is a standard requirement in case there is an influx of customer withdrawals.
The formula for the required reserve ratio is pretty simple:
Reserve Ratio (RR)= Deposits (D) x reserve requirement (rr)
RR= D x rr
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