Where is new money going?
How coins and bills are made
The cash is created under state control. The right to mint coins lies directly with the state. The state Bundesbank produces the notes. The private commercial banks have to buy both coins and bills from the Bundesbank.
The price of cash is based on the imprinted or printed value and is to be paid in cashless central bank money. Payment is made via the central bank account that every commercial bank maintains at the central bank. The cash is delivered with the money transporter.
Both the state and the Bundesbank make a profit with cash. In the case of coinage, the profit arises from the difference between the impressed value and the production costs, which are only a few cents.
This so-called seigniorage, also known as Schlagschatz, is paid out by the Bundesbank to the finance minister when it accepts the coins for resale to the banks.
The Bundesbank also earns from the difference between production costs and nominal value - but only in theory. In practice, the central bank buys about as much cash from commercial banks as it sells from them.
This cancels the seigniorage. Nevertheless, the central bank also remains a profit. It consists of the interest on the central bank money that the banks borrow to pay the cash.
How the banks create money
Many people believe that the loans that banks make come from the deposits of savers. That is a mistake. In truth, the loans are granted regardless of the deposits.
The banks create the money out of nowhere by simply crediting the amount to the borrower's account. In this way, new money is created with every loan. Experts therefore speak of credit money creation.
There are no limits imposed on banks when it comes to the creation of credit money. However, the central bank tries to control the money supply indirectly. One instrument is the minimum reserve.
This means that banks are required to secure their loans with the central bank by depositing central bank money in their accounts. However, the minimum reserve is only one percent of the loan amount, so that critics doubt the steering function.
How cashless central bank money is created
Cashless central bank money also comes into the world through credit money creation. In this case, the commercial banks take out a loan from the Bundesbank. This will credit the amount to the bank's account. Here, too, money arises out of nowhere.
The amount of cashless central bank money is usually based on the needs of the banks. If they need a loan and can deposit enough securities or gold, the central bank approves the loan.
In theory, the amount of newly created money should roughly match the expected economic growth. It has not been the case for a long time. Money creation and economic growth are decoupled.
The criticism of money creation by the banks
Critics have repeatedly called for the banks to be deprived of the privilege to create private deposit money and instead to transfer it to the state. In fact, private deposit money creation involves some risks.
The money created through loans usually goes where it promises high profits, i.e. in large projects, global corporations and high-yield products.
Small projects, regional companies and low-return products are left behind. Banks also seldom focus on the common good when granting loans.
Another problem, from the point of view of the critics, is that banks create money in a procyclical manner and thus increase the upward and downward swings. One example is the real estate bubble in the early 2000s, which culminated in the global financial crisis in 2007.
As long as things went well, the banks gave out tons of loans and pumped way too much money into the market. Much of it ended up in speculation and led to the formation of bubbles. When the bubble burst, banks cut back lending and, with it, money creation. Suddenly there was a lack of money, especially in the European crisis countries.
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