It’s easy to get the “what”, while the “why” is a bit more complex. But I’ll try to provide a simplified explanation through 3xWhy:
In short, more money is available for bargaining over the same resources.
Why?
When economic growth outpaces production, you pretty much create money that isn’t backed by anything.
Why?
You put money in the bank, you earn some interest. The bank loans this money to someone else, they also earn interest. And the thing is, banks don’t need to actually have the money they loan out. They only need to cover a percentage of it. In effect, money is created from nothing.
Why?
It’s called fractional reserve banking. IIRC, the Dutch started it, but don’t quote me on that. It was done in an effort to make it easier to keep me ney in circulation and foster economic growth. In short, the bank doesn’t have to wait for person A to repay the loan before providing a loan to person B.
Isn’t this a horrible idea?
Not necessarily. If handled poorly, it truly can be horrible. See 2008 for more details. But when done right it allows more people to do more with less. So inflation isn’t inherently a bad thing, provided that wage growth keeps up. If I’m not mistaken, 2% is a pretty common inflation target in developed economies during stable periods.
It was done in an effort to make it easier to keep me ney in circulation and foster economic growth.
There was no large plan or design to it. It was done because it’s profitable and there was no rule against it. This was a time before banking and government was so heavily intertwined through regulation.
if FRB actually ends up being profitable, that means it has created positive values in the society, so that in of itself is not bad. though it does have problems: 1) it creates a asset owning social class, whose values increasing by owning shares in business (which are effectively debts). 2) when it fails (i.e. when banks suffer losses), it can fail spectacularly, again see 2008 for more details.
It’s easy to get the “what”, while the “why” is a bit more complex. But I’ll try to provide a simplified explanation through 3xWhy:
In short, more money is available for bargaining over the same resources.
When economic growth outpaces production, you pretty much create money that isn’t backed by anything.
You put money in the bank, you earn some interest. The bank loans this money to someone else, they also earn interest. And the thing is, banks don’t need to actually have the money they loan out. They only need to cover a percentage of it. In effect, money is created from nothing.
It’s called fractional reserve banking. IIRC, the Dutch started it, but don’t quote me on that. It was done in an effort to make it easier to keep me ney in circulation and foster economic growth. In short, the bank doesn’t have to wait for person A to repay the loan before providing a loan to person B.
Not necessarily. If handled poorly, it truly can be horrible. See 2008 for more details. But when done right it allows more people to do more with less. So inflation isn’t inherently a bad thing, provided that wage growth keeps up. If I’m not mistaken, 2% is a pretty common inflation target in developed economies during stable periods.
There was no large plan or design to it. It was done because it’s profitable and there was no rule against it. This was a time before banking and government was so heavily intertwined through regulation.
if FRB actually ends up being profitable, that means it has created positive values in the society, so that in of itself is not bad. though it does have problems: 1) it creates a asset owning social class, whose values increasing by owning shares in business (which are effectively debts). 2) when it fails (i.e. when banks suffer losses), it can fail spectacularly, again see 2008 for more details.