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How is money put into the economy? ie how is wealth created?

Most answers to questions like mine beg the question of where the money actually comes from, how it actually enters the economy, and to whom is it actually distributed when more money needs to come into the system. This ties into the creation of wealth. No matter how big the system, 3 people or 3 billion people, it seems impossible to create wealth without creating more money. Otherwise you are just shuffling money around, but not creating new wealth. For example: Suppose there are 3 people, who have basic needs met (food, shelter), living on a desert island. They each have 10 $1 bills. Joe creates widget from coconuts, and sells it to Tom for $5. Tom makes a necklace and sells it to Bill for $5, and Bill creates a cup and sells it to Joe for $5. Although three new products have been added to this small (but growing!) economy, there is no creation of wealth without the creation of more money. (assuming you can't barter)
So for the economy to grow - they must agree to increase the money supply to reflect this growth. Now I know the federal reserve prints money, but how do they get it into the economy?


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    Mar 25 2013: It used to be the role of the central bank to create money, but today it is no longer so. Every commercial bank can, and in fact does, create money in quantities far exceeding their deposits. The result is that there is much much more money circulating in the economy than what the CB create.

    To understand the whole process I strongly recommend the book by Jesus Huerta de Soto "Money, Bank Credit, and Economic Cycles".
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      Mar 25 2013: fractional reserve predates modern central banks many hundred of years. banks started it.
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        Mar 25 2013: Yes, but it was in the times when they could go bankrupt for their stupidity. And they did dime a dozen.
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          Mar 25 2013: it still does not support your claim :)

          banks kept expanding, but they were limited. enter the central bank as "conductor", and a nice simultaneous expansion can happen. central banks never for a second expanded the money supply without banks multiplying it. and cb's are still in charge, and commanding the ship.

          unless, of course, you consider the king a central bank, and clipping money expansion. which is kind of true, but it was a different magnitude.

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