Currency has been in American society for a long time. Actually, this question is for any kind of money really. Just wanted to specify so I make more sense,
So how did the government actually get USD/paper money into rotation? Did they just give it out? People traded in the old currency?
In: Economics
Most dollars in the system are IOUs.
Banks are in a club together. The leader of the club is called the Fed. They tell the other banks how much money they each get to play with. They do it by moving numbers on a computer to tell each bank how much they can lend out.
The banks then use what’s called a fractional reserve. They take money people put into the bank and loan it out to other people.
Then those people also take the money they borrowed and put that in another bank who then does the same thing. The banks then loan it out again multiplying it again.
Since 2020 the fractional reserve required amount is 0% so there’s no limit to how much this could be done. So most of the money is IOUs for other money which are IOUs for other money which originally was just numbers on the Fed’s computer.
But the Fed indirectly put limits on the banks on how much they can do this depending on what they think the economy needs. This system has its merits and also its downsides. But it’s built on layer on layers of IOUs
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