How Money Works — A Layman's Version

P4　—　Do banks lend out deposits?

The money in your wallet and the money in your account: whose liability is it? We will explain the mechanisms of banks, central banks, government bonds, interest rates, and prices one by one, without using technical jargon.

Supervised by: Mitsuru Hayama　／　Reading time (main text): About 11 min (5,569 characters of text at 500 chars/min; exercises and readings not included)　／　Beyond the text: 6 exercises · 2 coins · 3 readings

What this course teaches you to do

• Be able to distinguish between the banknotes in one's wallet and one's account balance based on whose liability they represent.
• Be able to explain in one's own words the process by which bank lending creates deposits.
• Be able to state the central bank's targets for interest rates and prices as specific, time-bound figures.
• Be able to translate news of an "interest rate hike" or "weakening yen" into its impact on your own household finances.

Lessons (8)

1. Money in your wallet and money in your account — whose liability is it?Banknotes are a liability of the central bank; an account balance is a liability of a commercial bank. Even if the face value is the same, the counterparty is different.
2. Do banks lend out deposits?Loans create deposits. However, there are limits, and the final determinant is the central bank's interest rate.
3. If a bank fails — The line that protects depositsDeposit insurance is established automatically. The limit is 10 million yen in principal plus interest, per person, per financial institution. The level of the limit differs by country.
4. What do central banks do? — They move interest ratesCentral banks move interest rates. The target is 2 percent inflation. Numbers come with dates.
5. Government Bonds — The government's debt, whose asset is it?Government bonds are the government's debt and an asset for the holder. The largest holder is the Bank of Japan. Households hold them indirectly through deposits and insurance.
6. Prices — Measuring the Cost of a BasketPrices are the cost of a basket. Figures should be accompanied by a time reference and base year. Your own basket is different from the average.
7. Foreign Exchange and Daily Life — Reading the Strong/Weak Yen in Your WalletForeign exchange is an exchange ratio. 10,000 yen ÷ rate = dollars received. The smaller the number, the stronger the yen.
8. Placing a line from the news within the frameworkWhich money, whose debt, the number's time point, where in my budget. Read a headline with these four questions.

Readings (3)

• The Panic of 1907　United States　October 1907　New York, the counter of a trust company
  Section 3. The Bank Run of 1907. From the perspective of the queue, deposits are the bank's debt.
• Three thousand years of inflation　Overview: 2,700 years of the world　the present day　Vaccination
  Section 4. The Volcker Interest Rate Hike. How a single number, the interest rate, affects both households and factories.
• Famine and the smashing of houses　Japan　1787　Edo and Osaka
  Section 6. Rice for 100 Mon. The Edo-period concept of measuring prices by the basket.

Assessment

6 exercises in this course (4 check, 0 compare, 2 written). Progress is recorded by self-assessment.