The Case of the Gigantic $100,000 Bill
Don't let anyone say the Fed doesn't have a sense of humor.
Via Philadelphia Fed's Econ education program, we get this enlightening lesson in money creation intended for high schoolers:
In this lesson, students participate in a demonstration of the money creation process using a large $100,000 bill. Expansions of the money supply caused by successive deposits and loans are traced on the board so that students can observe the process. Required reserves are cut from the large bill during each stage of the process. Students learn to calculate the upper bound of the money creation process using the simple money multiplier.
After an hour of playing with a giant $100,000 bill (the Fed suggests students use a $100,000 gold certificate, how ironic), students will be able to demonstrate how successive deposits and loans by depository institutions cause the money supply to expand, calculate the simple money multiplier when a required reserve ratio is provided and explain that money is created when banks make loans and destroyed when loans are repaid.
It seems this is an older lesson as it does not discuss what happens when the FOMC goes balls out and starts buying $900 billion in securities to stimulate the economy.
Here's the best part, teacher instructions very clearly obscure the process of money creation by deflecting responsibility:
Explain that the class has an interesting word problem to solve. Write the following word problem on the board: “Suppose Jack purchased 100 beans at the market. When he plants those beans at home, the resulting beanstalk produces five times as many beans as he planted. How many beans grew on the beanstalk?” Give the students a minute to read the question. Ask the students how many beans grew on the beanstalk. (500)
Ask the students if they think there is a way for money to be created in the same way. (Most will say no.) Ask the students who they think creates money. (Answers will vary, but some will say that the government creates money.) Explain to the students that in this class, they are going to explore the process by which banks create money.
And if Ben Bernanke buys up 100 beans that no one else wants to buy, can you explain how that turns into 300 jobs for bean sellers?
Didn't think so.
Way to keep financial literacy at the forefront, Philly Fed. Too bad this lesson completely ignores the most dangerous component of the money-making machine.
Is there a follow up lesson that discusses what happens when the banks get greedy and loan out too much and need to come begging at the Discount Window and later Congress for a bailout? Whose $100,000 gold certificate does that come out of?
Thanks for the laugh, guys!