Many years ago I had a thought. Quite a big one, actually. It was hardly original, but to my mind it raised a question that demanded an answer.
The thought was this: the amount of money denominated in any particular currency isn’t fixed – in almost all cases it increases over time. It must do, otherwise economies wouldn’t be able to grow (at least not in units of the aforementioned currency). The question, therefore, is where does the extra money come from?
Luckily, the place I was working at the time contained a number of people whose job was to know about the economy and economic policy. Some of them would go on to related careers in government, journalism and finance. Surely they could tell me where money comes from.
But here’s the thing, none of them could. It’s not that they were stupid. They knew the facts and could crunch the numbers required to get their degrees and do their jobs, but clearly that knowledge didn’t include an answer to my question.
Of course, even I knew where physical money, i.e. cash, comes from. The notes are printed and the coins minted by the state. However, in a modern economy, cash is the loose change of the money supply – most of which only exists electronically in the form of bank deposits and the like.
So where does that sort of money come from? None of the people I asked knew. It’s strange because while we talk endlessly about how money is earned, spent, taxed and redistributed, how it comes into being barely gets a mention.
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