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April 26, 2018 

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BANK PANIC: Economy-wide concern over the stability of the banking system prompted by the failure of a few banks, which then contributes to the failure of many more banks, which contributes to the failure of even more banks, in a snowballing effect.

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Lesson Contents
Unit 1: A Little Magic
  • Money
  • Banks
  • Money Creation
  • Unit 1 Summary
  • Unit 2: Fred Returns
  • Review
  • Currency
  • Paper Loans
  • Money Creation
  • Unit 2 Summary
  • Unit 3: Modern Banking
  • Fractional-Reserve Magic
  • Injection
  • Another Bank
  • Yet Another Bank
  • Total Creation
  • Unit 3 Summary
  • Unit 4: The Multiplier
  • The Concept
  • Reserve Ratio
  • Money Multiplier
  • Unit 4 Summary
  • Unit 5: Policy
  • Control
  • Unit 5 Summary
  • Course Home
    Money Creation

    The magic of money creation as practiced by private banks is the topic of this lesson. While it seems like magic, money creation is a fundamental aspect of fractional-reserve banking. As such, in this lesson we take a look at why and how banks create money (a task they would seem to be the exclusive privilege of government). This examination of money creation provides insight into how government is able to control the economy's money supply.

    • The first unit introduces the magic of money creation, as practiced by the banking system.
    • The second unit presents a hypothetical example of money creation as practiced by Fred the Goldsmith, where the money is different, but the process is comparable to modern banks.
    • The third unit of this lesson, then examines a detailed example of how the banking system goes about creating money when it has an injection of excess reserves.
    • In the fourth unit, the money creation process is summarized in terms of a deposit multiplier, which a thought or two on how this can be expanded to a money multiplier, which interests government as it seeks to control the money supply.
    • The last unit of this lesson examines the money creation process in the context of monetary policies and government control of the money supply.

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    WHAT?

    The allocation question that determines the types and quantities of goods and services produced with society's limited resources. What goods and services are produced with society's limited resources? This is one of three basic questions of allocation. The other two are How? and For Whom?

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    Today, you are likely to spend a great deal of time at a garage sale trying to buy either one of those memory foam pillows or a remote controlled train set. Be on the lookout for small children selling products door-to-door.
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    In the Middle Ages, pepper was used for bartering, and it was often more valuable and stable in value than gold.
    "Sometimes when you innovate, you make mistakes. It is best to admit them quickly and get on with improving your other innovations. "

    -- Steve Jobs, Apple Computer founder

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