6 - THE CREATION OF MONEY

Abstract

This chapter discusses how money came into existence. The various restrictions applied to the banking system in UK by successive governments are in part the result of a desire to prevent an explosion of credit and a runaway money supply. The greater the quantity held, the less highly units are valued. Only by making the holding of money more attractive, by lowering the rate at which it is offered, can people be induced to take money into their portfolios. Prospects of profitability are poor in a stagnant economy, and this is likely to discourage entrepreneurs. To a limited extent the creation of bank credit will stimulate the level of economic activity and hence the future level of demand for further bank advances, but even then there is a limit to the amount of advances which can safely be made—a limit to the demand from eligible borrowers. Money is the ultimate form of liquidity and has exceptional convenience. When banks create money, they create an asset of particular significance in an exchange economy.