When the governement lowers the lending rate, as it did to a low of one percent not too long ago, it creates money without actually printing it. Here is an example: Say you have a bank, let’s call it MONEYMAKER BANK, that gave a loan to guy, let’s call him Bob for 500,000. Bob was enticed by the low interset rate and mortgage payments. Bob went and bought a house from a homeowner named Joe with that 500,000. Joe takes that 500,000 and opens an account at MONEYMAKER BANK and deposits the 500,000 into it. The Fed allows MONEYMAKER BANK to reserve 20 % of that money and allows the bank to loan the 400000 for another loan. Another customer, Craig comes and takes out the 400,000 loan and buys a house from another homeowner, who in turns deposits that money … So a 500,000 loan will grow to 900,000 (500,000 + 400,000) which wil in turn grow to 1,220,000
(500,000 + 400,000 + 320,000) and so on and so forth. All this money now exits as numbers in a bank without the treasury actually needing to print money. Actually if you look the actual paper money supply does not grow that much, but the dollar numbers the banks holds does.
