Topic 3 - Money creation

Question 1

National/central bank

Answer 1

printing the money

Question 2

Commerical bank (other banks)

Answer 2

• create money by accepting deposits and offering loans
• realized that not all of the depositors show up for their money at the same time
• since money is homogenous, banks can pay back the depositor who is asking his money back with the money of any of the banks depositors

Question 3

How increase the quantity of money?

Answer 3

the bank lend out 2/3 of the money to those who seek credit. 1/3 is in “reserve”. by doing so, the bank actually increases the quantity of money

Question 4

How is this linked to psychology?

Answer 4

trust –> the confidence shown by the general public in the capacity of the banking system to pay back deposits is primordial. –> without confidence, what follows is a so-called “run” on the banks, when many depositors rush to the bank to ask their deposit back –> any back could only withstand such a rush for 2 or 3 days at most.

Level of trust depends on cultural values.

If trust does not exist, there is no chance that a banking system would work out.

Question 5

Fakuyama

Answer 5

“the more you have trust at the family level, the less you have trust in the society at large”

Question 6

How to destroy it?

Answer 6

1) Forget about believes, emotions and refer to it as probabilities –> trust will not function. Trust is subjective.
2) Refer to it only in a rational way (calculate probabilities only and leave out the human factor).