Fiat money Monetary system

the alternative commodity money system fiat money defined central bank , government law legal tender if has no intrinsic value. typically fiat money paper currency or base metal coinage, can exist data such bank balances , records of credit or debit card purchases.

in modern economy money held deposits in banks, , fraction exists currency (notes , coins) relatively small. money created, contrary written in textbooks, banks when loan customers. put simply, banks lending currency customers creates more deposits , deficit spending.

in normal times, central bank not fix amount of money in circulation, nor central bank money ‘multiplied up’ more loans , deposits. although commercial banks create money through lending, cannot freely without limit. banks limited in how can lend if remain profitable in competitive banking system. prudential regulation acts constraint on banks’ activities in order maintain resilience of financial system. , households , companies receive money created new lending may take actions affect stock of money – ‘destroy’ money or currency using repay existing debt, instance.

central banks control creation of money commercial banks, setting interest rates on reserves. limits amount of money commercial banks willing lend, , create, affects profitability of lending in competitive market. opposite of many people believe creation of fiat money. common misconception central banks print money, not reflective of happens.

today s global monetary system fiat system because people can use paper bills or bank balances buy goods.