Why are banks allowed to create money?
Creating money
Banks create money during their normal operations of accepting deposits and making loans. In this example we'll use M1 as our definition of money. (M1 = currency in our pockets and balances in our checking accounts.) When a bank makes a loan it creates money.
Banks can create money through the accounting they use when they make loans. The numbers that you see when you check your account balance are just accounting entries in the banks' computers. These numbers are a 'liability' or IOU from your bank to you.
Banks also make money from the interest they earn when they lend money to their clients. The funds they lend come from customer deposits. However, the interest rate paid by banks on the money they borrow is less than the rate charged on the money they lend.
They earn interest on the securities they hold. They earn fees for customer services, such as checking accounts, financial counseling, loan servicing and the sales of other financial products (e.g., insurance and mutual funds).
A world without money will require an extremely ideal approach as when people are stripped of the incentives of activity, they choose to not participate in the activity. If workers receive no rewards, they will not work. But this will not eradicate any of the human needs crucial to the survival of humanity.
It creates money not by printing currency but by effectively adding funds to the money supply. The Fed does this in various ways, including changing the target fed funds rate with the goal of affecting other interest rates. Or it may buy Treasury securities on the open market to add funds to bank reserves.
We've all been short on cash at one time or another. And when you're desperate, the idea of creating some “extra” money on your inkjet printer might seem like an easy solution. But counterfeiting currency is no small crime — it's a federal felony that can land you in prison for up to 20 years!
One of the drastic and immediate outcomes of printing excessive amounts of money is inflation. When the supply of money surpasses the demand for goods and services in an economy, prices will begin to rise rapidly, and that is a problem. This erodes the purchasing power of individuals and undermines economic stability.
The bottom line. Printing more money is a non-starter because it'd break our economy. “It would take care of the debt but at a price that's far too high to pay,” Snaith says.
Who owns the money in a bank?
At the moment of deposit, the funds become the property of the depository bank. Thus, as a depositor, you are in essence a creditor of the bank. Once the bank accepts your deposit, it agrees to refund the same amount, or any part thereof, on demand.
There is no law about where you should keep your money.
Lending and mortgage origination practices become "predatory" when the borrower is led into a transaction that is not what they expected. Predatory lending practices may involve lenders, mortgage brokers, real estate brokers, attorneys, and home improvement contractors.
In reality, banks do not “create” money, but merely act as intermediaries between buyers and sellers of assets. Banks do this by facilitating financial transactions of an asset through loans.
Bank loans issued by commercial banks expand the quantity of bank deposits. Money creation occurs when the amount of loans issued by banks increases relative to the repayment and default of existing loans.
You can look to see the amount of total deposits that a bank has and look to see whether they have been increasing over time. A strong track record of stable growth is an indicator of consumer confidence and the bank's ability to strengthen its balance sheet.
If everything was suddenly free, you would quickly discover that many of the things you want — and many of the things you need, such as food — might no longer be available! For example, farmers produce food for you to eat, because they receive income when you purchase that food.
There is not a single entity that has the unquestionable claim on the whole planet (unless they just want to scam you). Also, Earth is a celestial body. According to current space law”no nation can “own” space, the Moon or any other body”.
If you're a single person, living without money will be much easier to manage than if you have a family. Because living cash-free is a huge commitment, you will want to make sure that your essential needs can still be met without money.
If the government creates too much money, people would end up with more money in their hands. Consumers would demand more and supply in the short run would fail to meet the sudden rise in demand. High demand pushes prices up, which in the worst-case scenario can lead to hyperinflation.
Where does printed money go?
So when it prints money, sadly the Fed is not just handing it out to you and me. Rather, it is taking bonds and other fixed income assets out of the market (which lowers borrowing rates) and swapping them for bank reserves. In other words, the banks have all that “printed money”.
Federal Reserve Banks' stock is owned by banks, never by individuals. Federal law requires national banks to be members of the Federal Reserve System and to own a specified amount of the stock of the Reserve Bank in the Federal Reserve district where they are located.
18 USC 333 prescribes criminal penalties against anyone who "mutilates, cuts, defaces, disfigures, or perforates, or unites or cements together, or does any other thing to any bank bill, draft, note, or other evidence of debt issued by any national banking association, or Federal Reserve Bank, or the Federal Reserve ...
So while the million-dollar bill may be a fascinating concept, it is not an official currency and holds no value as legal tender.
The one dollar has an average life span in circulation of 6.6 years according to the Federal Reserve. Compare that to the $100 bill, which has an average life span of 22.9 years because it doesn't pass between users as frequently.
