Understanding the System of Money

                               

Do you know the ‘Distribution and flow of Money’ is governed or run by a System?

Yes. There is a system which governs how much money is printed and distributed in the country, to facilitate exchange for products and services, to fund the production of goods, to enable lending and economic growth and stability……

 

Let’s examine The System which governs the Flow of Money, and the participants of this System:

 

How does Money get into the Economy of a country?

Who prints the Money which is in circulation in the country?

How much money do they print?

Could they print more money any time they need it?

What would happen if they print more money than is necessary?

My friends, to answer these questions, and to help you understand how the system which governs the flow of money functions, you’ll need to know two (2) things:

 

1.  Money was designed to follow a cycle

Meaning: Only a certain amount has been printed and is being circulated in the country.

Money moves in a circle. More money is not printed every moment of every day. What has already been printed and in circulation, simply changes hands and accounts, daily; through expenditure and deposits.

This is necessary to ensure economic stability. If more money was allowed to be printed and circulated in the country, you could have an increase in inflation.

Which means: You have more money circulating in the country than there are products. And because people have more money to spend, the demand for products can rise more than the ability of manufacturers to meet the demand…..More Money and fewer goods can lead to an increase in prices – An increase in inflation.

(Of course, there are other factors which affect inflation).

 

2.  Who are the participants in this system which governs The Flow of Money?

 

The five (5) major participants in the system which governs The Flow of Money are:

                                                           

1.  Central Bank

Some of the things which the Central Bank are responsible for are:

 

  • Printing and redeeming money. Redeeming money simply means replacing old or unsightly dollar bills with new ones.

 

  • Controlling inflation – Maintaining a low and stable rate of inflation in the country. It does this by: Raising or Lowering the amount of money which banks are legally required to deposit with The Central Bank; Buying or Selling Securities (also known as: Open Market Operations); Raising or Lowering the interest rate it charges commercial banks who need to borrow money from The Central Bank (this interest rate is known as: Repo rate. At the time of this writing, it is 8.25%).

 

Through these measures, The Central Bank controls the money supply or the amount of cash circulating in the economy.

 

  • Creating an orderly exchange rate

 

  • Ensuring the exchange rate remains stable

 

  • Ensuring that the country has an adequate level of foreign exchange reserves.

 

  • Conducting banking transactions for the Government: They hold deposit accounts for the Government, which are used for receiving funds, making payments and clearing cheques issued by the government departments, making payments for foreign goods and services etc.

 

  • Preserving Financial Stability by conducting regular inspections of licensed financial institutions.

 

The Central Bank holds an essential role in creating and maintaining economic stability in the country.

 

2.  Government

What part does the Government play in the system which governs The Flow of Money?

The Government pumps money into the economy by spending the money they receive from the Central Bank or other lending agencies, and the money they receive from taxes collected from individuals and firms, on: Salaries, Goods & Services, development programs, subsidies, Interest payments on loans…….

The following is just a synopsis of the process.

 

the cycle of money

 

3.  Businesses:

What role do businesses play in the flow of money?

Simply put: Local Businesses spend money to start and maintain their business; and they also generate money from the sale of products and services……thereby helping money to follow its course.

Part of the money generated from businesses is used to pay the wages of their workers, reinvest in their business, to pay taxes to the Government, to pay investors, to service personal needs and wants (if it is a sole proprietor business), to save or invest in financial institutions etc. etc.

The money the Government receives from taxes and dues collected from local businesses, goes right back into the cycle money was intended to follow.

 

Food for Thought:

If you had this Power – The Power to make and pass a law, which could get the people of the country to give you hundreds of millions of dollars in the form of taxes, how would you use that Power….And if you did pass a law to generate this kind of capital, what would you do with the money?

                                                

4.  Financial Institutions

When individuals, recipients of money, or companies receive money in the form of wages, financial gifts, or monies received from the sale of products or services, they may deposit a portion of this money into financial institutions for safekeeping, savings or investments.

These financial institutions then lend out a significant portion of the monies deposited with them to individuals or businesses that want to borrow money for either expenditure or investing purposes. They also invest a part of it in other profit-generating mechanisms.

 

  5.  People

If the people of the country decided collectively, not to spend, or to spend very little of the money they receive, the economy of the country would be in trouble….That’s because, people play an integral role in the cycle money follows.

Now even though the people are last in this cycle, they are by no means the least important; if they hoard all the money they receive, they would stop the flow money was intended to follow, and cause a clog in the system. Their role is to: Save, Give, Invest and Spend. Anytime they stop doing this, or collectively use their money without balance – It can lead to either inflation or recession.

Understanding this flow of money can help you to identify keys reasons why one group will give their money to the other. And what would happen if there is a clog in this flow, or if there is too much money flowing among and between these five (5) interest groups.

Okay. All we have covered, so far, just shows us that the specific amount of money, which had been printed by The Central Bank and spent by the Government, simply circulates in the country……moving from one person’s pocket and account to another, everyday. This is just a synopsis of The Flow of Money. I hope it was simple to understand. However, to sum things up – I’ve included a diagram to depict The Flow Money follows:

 

system of money - the cycle of money

 

Just to recap:

 

  • Only a specific amount of Money is printed and circulated in a country

 

  • Money is cyclical. Meaning more money is not printed, everyday. What has been printed and circulated in the country only change hands and accounts. It moves from one person to the next, usually in exchange for the purchase of goods and services.

 

There are five (5) groups involved in the movement of money. They are:

  1. The Government
  2. Central Bank
  3. Financial Institutions
  4. Businesses – Small & Large
  5. The People of the country

 

Money moves from each one of these groups to the next, everyday.

In summation: To ensure that the system of money works, there are four (4) things each participant in the flow of money needs to do whenever they receive money:

 

  1. Give some to charity
  2. Save some of the money they receive
  3. Spend some of the money they receive
  4. Invest some of the money they receive

 

Click Here to return to the third part of this Financial Series:  The 6 Powers of Money

Click Here to return to the first part of this Financial Series:  The History of Money