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Money, Banking and Financial MarketsWhat is currency circulating in the hands of the...

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ranger1980 | Student, Undergraduate | Valedictorian

Posted March 18, 2012 at 9:42 PM via web

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Money, Banking and Financial Markets

What is currency circulating in the hands of the nonbanks public considered a liability of the central bank?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted March 18, 2012 at 11:09 PM (Answer #2)

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This is because all currency that is out there is essentially a claim on the central bank.  When we hold currency, we hold a claim on the assets of the central bank because that is what currency is.  It is a piece of paper that has the full faith and credit of the United States behind it.

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readerofbooks | College Teacher | (Level 2) Educator Emeritus

Posted March 19, 2012 at 2:08 AM (Answer #3)

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When we got off the gold standard, all paper money was based on faith. This is why ratings are important, because it shows people how well a company or nation will be able to pay back it debts. So, if there is more paper currency floating around, it is a liability for two reasons. First, how will people or nations pay it back? Second, the more money there is in circulation, the less money is worth.

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litteacher8 | Middle School Teacher | (Level 1) Distinguished Educator

Posted March 19, 2012 at 4:54 AM (Answer #4)

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There is not enough actual money for all of the currency that is floating around in the world.  If people are holding onto currency, then there is even less.  If everyone decided to keep cash in their mattresses instead of the bank, we'd have a crisis.

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literaturenerd | High School Teacher | (Level 2) Educator Emeritus

Posted March 19, 2012 at 7:02 AM (Answer #5)

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There is a problem with the currency based upon the numerous claims against the central bank. Given that the backing of money, gold, does not cover the amount of printed currency, one could actually state that the money in their hands is utterly worthless-- there is simply not enough gold to cover the printed money.

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rrteacher | College Teacher | (Level 1) Educator Emeritus

Posted March 19, 2012 at 9:12 AM (Answer #6)

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Gold is no longer the "backing of money" and hasn't been officially since the Nixon presidency. It was really FDR who took the US off the gold standard, which severely limited the available options in time of economic crisis. Many of Hoover's failures stemmed from his refusal to do so. Modern money is fiat money, meaning that it is legal tender backed by law. Inflation is possible, indeed likely, but as long as government exists, it cannot be worthless by law.

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vangoghfan | College Teacher | (Level 2) Educator Emeritus

Posted March 19, 2012 at 3:54 PM (Answer #7)

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If a true financial crisis does occur in the next few years, it could make the Great Depression look like a walk in the park.  I don't think the government during the late 1920s and early 1930s was in anywhere near the kind of debt that it is now in, and it certainly had far, far fewer unfunded liabilities. There is probably no way that the government could now meet all its many obligations if it ever had to do so.

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accessteacher | High School Teacher | (Level 3) Distinguished Educator

Posted March 19, 2012 at 5:19 PM (Answer #8)

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Let us remember that at the end of the day a $10 bill is actually just a bit of paper. What transforms it into something that is worth money that we can buy something with is the bank and its promise to honour that $10 bill and to treat it as if it were actually $10. This makes any money a liability of the bank in this way.

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belarafon | High School Teacher | (Level 2) Educator Emeritus

Posted March 20, 2012 at 9:09 AM (Answer #9)

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Exactly correct; we place the value of $10 on the paper, and exchange it for something that we and society values at the same number. Money is, after all, just an expression of work; our work is valued at $x, and we spend it on things that equal that work. If money were eliminated, we could perform our work directly for the item, if the trade was accepted; it is only the numeric value that is arbitrary since, as others state, the gold standard is long a thing of the past.

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enotechris | College Teacher | (Level 2) Senior Educator

Posted March 20, 2012 at 10:13 PM (Answer #10)

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I wonder what the lag time is between the introduction of fiat money by a government and the subsequent economic, then political collapse of the culture that government was based upon. Certainly this has been tried in centuries past, and all with the same result. One of the final nails in the coffin of the Roman Empire was when the emperor attempted to fix prices, which destroyed what little trade still existed at the time.

The only was economic stablility can be maintained is if paper money is convertable.  Failing that, the promise of government backing currency is, well, believing the promises of government.

I'd rather the government get out of the money business altogether and leave the money supply alone.

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