27.4 Regulating the Quantity Of Money
MyEconLab Concept Video
Banks create money, but this doesn’t mean that they have smoke-filled back rooms in which counterfeiters are busily working. Remember, most money is deposits, not currency. What banks create is deposits, and they do so by making loans.
Creating Deposits by Making Loans
The easiest way to see that banks create deposits is to think about what happens when Andy, who has a Visa card issued by Citibank, uses his card to buy a tank of gas from Chevron. When Andy signs the card sales slip, he takes a loan from Citibank and obligates himself to repay the loan at a later date. At the end of the business day, a Chevron clerk takes a pile of signed credit card sales slips, including Andy’s, ...
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