Creating Money
Money, unlike most other things in life, does not exist. In fact, money has no physical existence. Everything that exists, including money, is only an abstract idea. Money, like space and time, is an abstract idea that has no substance. Yet money is the one thing that people and institutions universally agree on.
Money, as it is defined, is a commodity money. Commodity money generally refers to any unit of account that could be taken as payment for goods or services and settlement of debts, including taxes, in a given country or context. The different types of commodity money are: banknotes, coins, central bank reserves (such as those of the Central Bank of a country), central national banks, treasury bills and bonds, and bills of exchange.
Banknotes are issued by a central bank and are therefore regarded as legal tender in the same way as currency. The issuing bank distributes these bank notes, along with a paper portfolio, known as banknotes, to all citizens who request them. The aim of the issuer is to make sure that their liabilities are covered while they exercise their right to redeem the notes at a later date. The legal tender nature of banknotes is what helps make them a legal obligation for all consumers. The distribution of banknotes is usually done through banks, brokers, and financial institutions that are chartered by the government itself.
In order to exercise their right to redeem banknotes, banks have to first withdraw them from their held holdings of commodity money. Once this process is completed, they sell all of the remaining quantities of banknotes that they hold on the market, to other banks and other creditors. These entities are called redeeming agents. Once all of the certificates representing the various classes of bank notes have been sold, the convertible commodities backing those particular notes will be transferred into bank accounts.
Money is not a commodity, and like all commodities, money is always in short supply. This fact also underpins the very concept of banking. Since only a limited amount of money can ever be in existence at any given moment, all banks must adjust interest rates to keep from drawing too much money away from their customers. When they do this, the central banks that issue the bank deposits earn interest on their investments in these banks, creating money in the process.
Money, like everything else, is created and destroyed all of the time. While it may be difficult to keep track of how much money is created or destroyed all of the time, it’s much easier to judge the interest rates that central banks charge on their loans. Interest rates are set by the central banks according to the amount of money that they have to inject into the economy through their lending. Through the actions of the central banks, money is made and money is lent at relatively low interest rates to boost the economy through its borrowing process. Without central banks to control interest rates, the high street banks would be forced to charge higher interest rates on loans, which would make borrowing more expensive for consumers.