Money, where does it come from? And where does it go?


Many years ago I had conversation with my father in law about what it was like to be a young farm boy during the Great Depression in Alberta.
Not very exiting, as it turned out, just farm chores and getting into trouble on free time. There was no money around so you couldn’t do much of anything apart from the routine stuff.
Then, all of a sudden, things changed in 1938-9: The bankers just about hauled you in through their doors, offering loans and credit for farm improvements like livestock, machinery, etc.
Farmers became the golden boys. Why? Because the War was coming and banks were authorized by the government to make sure that food production was ramped up to support the war effort.
So, the Big Hand behind money in a modern economy is the state that can simply authorize the creation of money on its books by an act of its ruling body, in our case the Canadian Parliament, using the Bank of Canada which opened its doors for business in March, 1935.
Commercial banks, that make credit available to farmers, like my father in law, also create money when they make loans to individuals, by simply crediting the account of the borrower with the amount of the loan.
As chartered banks, they are allowed to do so under the rules of their charters.
When loans are repaid, the money gets ‘absorbed’ or eliminated within the accounting system.
There is an awful lot more to banking, including credit worthiness, trust and a host of other things, but that is for another day.

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