Creating Money
Money can be defined as any commodity that is used as a "means of payment," for whatever is exchanged for the goods and services that are bought. Murray N. Rothbard, Economist, looks at money in this manner, “Many useful goods have been chosen as moneys in human societies. Salt in Africa, sugar in the Caribbean, fish in colonial New England, tobacco in the colonial Chesapeake Bay region, cowrie shells, iron hoes, and many other commodities have been used as moneys. Not only do these moneys serve as media of exchange; they enable individuals and business firms to engage in the "calculation" necessary to any advanced economy. (Taking Money, 1).” In the United States of America, Money is created by banks. It began as a commodity in the form of gold. Carrying it around was risky, there was trouble determining the actual worth, using it in its physical state was cumbersome and dangerous. To resolve the dilemma, Goldsmith’s , who in the 16th and 17th century eventually evolved into Banker’s, stored large amounts of gold for the merchants because they had the best security systems in that time. In return, merchants were given slips of paper with the amount of gold that was being held for them. Over time this system evolved into what is now know as the banking system. The paper that was given to the merchant was a promise to pay gold on demand (Brue, McConnell, 3-4). Banks create money today by lending it. The money supply consists of the currency held by the public and deposit accounts made by the banks. These create a financial system known as the “Fractional Reserve System”. Banks keep only a portion of the funds deposited with them. Banks borrow funds from those with savings and in turn lend those funds to those in need of funds. Banks make money by charging a higher percentage interest rate than is paid to depositors for use of their money. If banks kept their available funding after their reserve requirements have been met, depositors might have to pay banks to provide safekeeping services for their money.