Question

Canada

• Discuss the evolution of money over time as it pertains to Canada.
• Describe the process used by the banking system to create and destroy money.

Answer 1

(a) Money is always used for making any transaction in the economy, it is an advance step in the economy while closing down the barter system. Canadian money has its roots in the Indigenous wampum belts of the East, the early currencies of European settlers and the influence of the United States. People in North America had been trading and bartering for goods and services long before European contact. During French colonization, coins were introduced, as well as one of the first examples of paper currency by a western government and notes were introduced by British colonization. Canadian people dislinked themselves from pound and USD. With Confederation in 1867, the Canadian dollar was established, by the middle of 20th century, only Bank of England is the sole supplier of Canadian dollar.

(b) To create money: Consider a situation when you have to keep the minimum balance of $100 dollar in your account otherwise there would be some penalty. If you keep $100 in your account always, bank will use that money of your to create more money. Lets say there are 500 account holders of that bank, which means a $50000 deposit in the bank which is actually the people money which they can withdraw at any point of time. Lets say one person comes to the bank who wants $10000 loan at the rate of 10% per annum. Bank will give them the loan from the deposit that they have and will earn the interest rate. They can lend upto $40000 because in case of emergency level some people tends to withdraw the money. So they can earn interest rate from others money. This was just a small population case. If you take example of full country, the sum would be large enough.

Destroy Money: We have discussed the case of giving loans to people which create more money in the economy. Destroying money is just the opposite of it when people pay back the loan they received from the bank i.e. suppose a consumer has spent money in the supermarket throughout the month by using a credit card (which is an example of the above situation when you take loans from bank). Each purchase made using the credit card will increase the outstanding loans on the consumer’s balance sheet and the deposits on the supermarket’s balance sheet. If consumer repay the bill, the account deposit account sheet will reduce by the same amount, thus destroying all of the newly created money.