Friday, December 19, 2014


The first myth about money is that it is backed by gold. It is not true, money today is not backed by gold or anything of that nature. It is backed by nothing more than the law of fiat. In other words a legal requirement to accept whatever is money as determined by the authorities.
The second myth about money is that 100% of a nation’s currency is its paper currency and coins. It is not true, paper currency and coins forms on average only 3% of a nation’s currency, 97% is money created by banks.
The third myth about money which is about to be debunked is that banks’ creation of money begins with a deposit of cash by a depositor in a bank. Then less a certain percentage paid to the central bank as reserves the balance is lent to a customer of the bank who in turn places the money in his bank which is again relent minus the central bank reserve. With the deposit of RM1000, and say a 2% statutory reserve the banks can create in total RM24,000 of money out of thin air making a new total of money of RM25,000. Indeed if the initial deposit is RM1 billion, RM24 billion of money can be created by banks out of thin air. This is referred to as the Multiplier Model of Money which is now being debunked as a money creation process even by Central Bankers such as Mervyn King, Governor of Bank of England in 1994, Adair Turner, Chairman of Financial Services Authority of Britain in 2011 and Vitor Constancio, Vice President of the European Central Bank.