Fun Facts

How governments make money

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While we all wish we could make money in our bedroom with a printer and some green ink, it is not so easy. It is up to the U.S Bureau of Engraving and Printing to create the money that circulates in the American economy with similar organizations in every country around the world. In America, the bureau is busy keeping up with demand.

The bureau prints money worth around $750 million every single day. This is because money has a surprisingly short life span. The average US$1 bill lasts only 21 months before it has to be replaced. The US$100 bill, on the other hand, can last over 7 years because it has a lower circulation rate. It is a big job and the bureau of engraving and printing uses 18 tons of ink every day just to maintain their rate of production.

When governments want to create more money to stimulate an economy there are a number of tricks to the trade. Of course, they could just ask the bureau to print more money but this essentially devalues the currency leading to an ongoing cycle of more money, less value, more money required, less value and so on. Instead, the best method to date for governments to increase the money circulating in an economy is to work with banks.

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When banks loan money they do it based on a reserve that they keep. If you put $100 in the bank they only need to hold onto $10. They will loan the other $90 to someone else. That someone else will buy the shoes they wanted. The shoe shop will lodge the $90 in the bank and they will keep $9 in the bank and lend out $81. At this rate of lending, the initial $100 can be worth $1000 to an economy. It is called the multiplier effect and is what drives an economy. By changing the rate of reserve and lending rules, governments can more easily change the level of money in an economy.

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