Credit Creation - Financial dictionary

"It is money that is wide and wide ..." Whenever an empty wallet is sad, it is a complaint. So seriously and more seriously. How much is the money that 's been around a lot. Obviously, the money that the Bank of Korea has taken is not everything. Even if you do not care about monetary economics tremendously , you may have learned about money multiplier and credit creation if you have learned economics in secondary school . The notion of reserves for the payment of the bank comes at this time. On the basis of this, the Bank of Korea measures M1, M2, and M3 currency levels and conducts a professional analysis of how much liquidity is released on the market. The process of creating another money (called credit money) as the money taken by the central bank is distributed to the public through banks is called 'credit creation'. It is because of the global crisis that these words, which appeared in textbooks, are used frequently and frequently these days. Because the government has released money and liquidity astronomically in order to fill up the financial institutions' insolvency, it is worrisome about the upsurge and inflation.

How will the money borrowed by the Bank of Korea blow?
From a simple review. Let 's assume that the Bank of Korea has borrowed 1 trillion won in funds from a private company, At this time, 1 trillion won is called the ' main currency ' because it was printed by the Bank of Korea . So how much money was released on the market? If an A company does not spend 1 trillion won in its treasury, it will be 1 trillion won. But in reality, this is not the case. A company will put money in the bank once and spend it every time it is used. Money goes to a private bank once. This is because it is more advantageous to receive the interest by letting it leave it in the bank rather than holding it in your hands. So the private bank that received the A company's money will keep the money in the safe? It is not so. The bank will also make a profit if it has to make money. A company will invest in loans or investments, leaving only money that it might ask for. At this time, the money left in preparation for A company 's demand is called the reserves of the bank.

Example of a credit creation process when the reserve requirement rate is 20%

In this case, suppose that the reserve reserve is 20% of the deposit. As a result, a private bank that owns 1 trillion won of A company will have 200 billion won left, and 800 billion won will be released again through lending and investment. Now, if company B has received 800 billion won in money from a private bank, company B will once again set aside money for the bank and find its investment. The 800 billion won that went to the bank will have the same structure and the 6 billion won will be released to the market (800 billion won × 80%). Suppose that this process repeats infinitely. How much total money will be released on the market. Remember the infinite isometric series in high school math time. The answer can be obtained. If the Bank of Korea put together the first 1 trillion won, the money that was released in the whole market is C (original currency). Assume that the ratio of the deposit that the bank should leave in the vault, that is, the reserve requirement rate, is r (20%). The total call volume is . That is, 1 trillion won / 20%. 5 trillion won. The money created by the circulation of currencies minus main currency is 4 trillion won (5 trillion won - 1 trillion won). The formula is expressed as.

Note that the time concept of how money is circulated is not included here. In the real world, this process can happen very quickly, or slowly, or even intermittently, depending on the psychology and investment strategies of the companies with the money and the bank.

Set the money to the bank to control the money
In the process of creating the credit, the central bank can find a tool to control the amount of money to be released on the market. This is the percentage of the reserve that the bank should keep in the safe, and the reserve readiness. The central banks in each country exercise the majority of the authority to determine this ratio. Let's recall the formula.


If all other conditions are ignored, the effects of credit creation will be severely hampered if the Bank of Korea improves the reserve ratio of commercial banks. This is of course also valid when the assumption is made that the intermediary function of funds is only for banks. The policy to adjust the amount of money, or amount of money, by adjusting the reserve requirement ratio is called the reserve requirement policy. If the central bank deposit is set by law, it is called the legal reserve, and the ratio of this reserve is generally called the reserve reserve rate. The reserve requirement manipulation is used as a macroeconomic tool to adjust for fluctuations in the business cycle and to mitigate its unstable effects on the economy. However, in reality, it is unlikely that central banks will try to control liquidity with this policy, and the effects are questionable.


Chinese consumer prices are rising rapidly. In 2010, Chinese banks raised their reserve ratios to almost the limit, but failed to catch liquidity.

Most recently, neighboring China's case has confirmed this. In fact, the People's Bank of China, the central bank in 2010, started to catch up on liquidity by raising the reserve requirement ratio. However, inflationary pressures surged in January and eventually led to a rate hike. Chinese authorities have already taken measures for high-intensity measures such as raising the reserve requirement for banks and enforcing real estate reserves in 2011, considering that price instability and asset bubbles could lead to social unrest. The Bank of China raised its reserve requirement ratio to 19%, but it did not seem to have had much effect in adjusting the amount of money.


Creation of credit or counterattack of money making
Credit creation has become a hot topic again as the central banks of the United States and other countries around the world have been taking steps to support financial institutions and businesses by taking advantage of the 'power of the foot' in dealing with the global crisis in 2008. Even if Milton Friedman 's words "inflation is a monetary phenomenon" do not lend to him, the ups and downs of the currency will be a regular menu of warnings from many economic experts.

The ` monetary theory of competition` , which seriously deals with the effect of credit monetary creation on the real economy, is drawing attention recently. There are several types of monetary theory of competition in and of itself. The UK's economist RG Hortley , who argues that the change in the money flow is the only and sufficient cause of the economic fluctuation, is a phenomenon of purifying the pulmonary phenomenon. The change in the supply of money causes over-investment, Hyak 's monetary over-investment, JA Schumpeter 's argument for credit creation and innovation are typical. The theory of monetary competition is opposed to the fact that economic fluctuations are caused by real factors such as excessive investment, unbalanced development among industries, and under consumption. However, the current theory of play often includes both arguments. The issuance of money and the creation of credits based on policy judgment rather than the supply and demand of real economy are important variables for the economy directly linked to our real life without staying in the concept of 'increase or decrease of money'.