Myths about Money you must know

Here are some common misconceptions.

  • Banks lend money that they receive from depositors.
    When banks issue loans, they create new deposits without disturbing existing deposits. This is what causes the money supply to grow and it is what separates bank lending from other types of lending. A non-bank lender (like a finance company) will only lend what is sitting in the bank. It can’t create new deposits like a bank can.

  • The government sometimes prints too much money and causes inflation.
    The government only prints money to meet the demand for currency. These notes are issued to banks in exchange for deposits the banks have to hold with them, that is, the Federal Reserve Bank. The public receives these notes in exchange for their deposits at the bank. The amount of money issued is no more, and no less than the public needs to hold in their wallets, or for a rainy day. It should have no bearing on inflation.

  • Bank reserves ensure there will be funds available for depositors.
    Each bank has to hold a minimum reserve of money with ...

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