05 Our Current Monetary System – M1 Money

05 Our Current Monetary System – M1 Money

How our current monetary system works

When people think of money ideas of the previous forms of money comes to mind. Something related to gold, related to something physical of value, one needs to mine it, aquire it or something. Most people don’t think of money as anything else, and its kinda hard to think how it could be any other way. But it is.  We have two parts of our monetary system. Something called M1 money, and something called M2 and M3 money. Lets deal with the basics. Most, if not all countries today have something called a ‘central bank’. Their job is to ‘regulate’ the introduction and destruction of money. What that means is that they have legal permission to print money. I don’t mean they hold gold or other valuable assists and use that as a banking for the money they issue, I mean they literally just print the money on demand. But they don’t just do that because they want to (most of the time) but there is a process that happens.
  1. Governments want to raise capital for whatever reason. So they issue a ‘Bond’1.
  2. Private companies, countries and banks buy these bonds, and therefore the government gets the money they wanted to raise
  3. Banks take these bonds and sell them to the central bank for profit. Ie they spend £10 buying the bond (for example) and then sell it on to the central bank for £11.
  4. The Central bank buys these bonds off of the other banks but do so with money they just print there and then. They literally write a cheque for the bank to cash in from their own bank account that has zero (0) in it. This is how M1 money is created.
  5. So now that the central bank now owns this bond that it bought with money it just created, the governments now have to pay back the money it borrowed via taxation to the central bank. So central banks can make money from money they never had.
  6. The central banks also control the rates by which these bonds, loans and mortgages are paid back
For further details on this please refer to the following video.  

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