Money is generally created by the state for the purpose of financial emergency and financial management. Moreover, the major part of money making, which is about 97%, is produced the moment a licensed money lender, like commercial banks, offer a loan. Basically, it was only through faith that money is created. However, this doesn’t mean that money creation doesn’t involve any risk. 

Most governments provide money on a too much basis and may therefore spawn too much inflation.

Generally, all commercial banks have the ability to produce too much money. In addition to that, banks can generate debt at an overrated status on top of the private economy. Aside from that, it also means that money also entails a great inner value. Thus, money is a simple indication of trust among the licensed money lender and the borrower. 

Money, perhaps, is the ultimate resource of democracy. The social investment factors include but not limited to the following:

• Education
• Welfare
• Public service

These are all cannot be afforded by most of the general public. Why is this so? It is basically because of the absence of the magic money tree.

The creation of money by commercial banks and licensed money lender

The moment the banks lend money, it is also the time money is produced. Double entry accounting applies to this aspect. This shows the moment the banks make an asset for a new loan and thus create a liability through a new demand deposit.

Similar with other forms of customer deposits, the demand deposit is covered by the central banks which is quantified by the broad money. Through this, remember that when banks and licensed money lenders lend money, they create money as well. However, to make sense over this money, it must be entirely backed up by a loan which is essentially a new asset.

Creation of money through constrained capital

This usually happens when a bank offers a new loan which entails a new deposit. It is the time when the size of the balance sheet heightens, whereas the ratio of the balance sheet from equity reduces. In case, the bank lends too much value in which the equity cuts reaches zero, the reduction in asset prices is sufficient to make it insolvent.

Additionally, the requirements of the regulatory capital are designed to guarantee that banks and money lenders did not reach a fragile aspect. But, it is such an arguable thing that entails its purpose. Yet, it is generally wrong for the bank to lend money without restraints. This is because commercial banks and licensed money lenders do not have magic money trees.