so this new chapter chapter 32 try to explain um in a way how the central bank can play their role to ensure that they can manage the amount of money supply in the economy and among the things that we have to really understand you know when it comes to the role of the central bank to manage the amount of money Supply um in the system you know the amount of money that we have in circulation today it is not entirely issued you know by the central bank loan Central Bank issued out physical money okay in the forms of currency and coins if you total up you know that total amount of physical currency notes and coins in total the value will only give you around 6% of the total amount of money supply in the economy okay uh the rest the remaining 94% or so those are basically money cred by banking institutions so what we are trying to understand here is we are trying to say that you know you know under the existing banking system what we call as fractional Reserve banking system um it allows financial institutions to also create money so that is why the title of this chapter is about money creation and we try to understand really how you know um the financial institutions like the commercial banks for instance how can they create money you know in the system Sy on top of what Central Bank issued out you know as physical money the rest are basically just numbers whereby it doesn't really reflects you know the true physical amount of money what you have in your bank account you know if you try to total up the total amount of money supply that you have in the economy it wouldn't be matching the value of currency notes and coins that we have in circulation that is very important for you to understand okay and I did share in my previous video in terms of how much is the total money in circulation you know when you total up M1 M2 and M3 for the case of Malaysia and so on so I think you have to watch that video and then try to understand and then relate back to this uh chapter so what we want to understand in this particular chapter we want to understand um you know the existing system that are in place uh which describe about the functioning of our banking system and this is what we call as fractional Reserve banking system okay the nature that we have today okay all this banking system or you know the money that we have in circulation you know it is on the basis of what we call as fractional Reserve banking system so we want to understand what it means by fractional Reserve banking system and how does this fractional Reserve banking system allows commercial Banks or other financial institutions to create money in the system okay why because as I mentioned earlier you know the amount of physical money that we really have in the system is just around 6% in other countries it wouldn't be more than 10 to 15% the rest are just virtual money in the sense that when I say virtual meaning that you know it doesn't really match uh in terms of the physical money that you have okay all those monies are basically just in the forms of numbers that you have in your account but if you try to withdraw all those money out of your account for instance um that wouldn't be able to match you know the total amount of physical money in terms of currency notes and also kind coins that you have in the system so in other words when we try to understand the fractional Reserve banking system we try to also understand you know how money can be created in the system how does this virtual money being created in the system and in order to understand that we also going to explore a few other important Concepts such as the term actual Reserve required reserve and also exess reserve and the last part of the chapter we're going to talk about monetary multiplier um and take note when we discuss about this particular chapter here chapter 32 um it is very important for you to comprehend um really this chapter because it has um strong connection with chapter on monetary policy that we're going to discuss in chapter 33 okay so your understanding of the next chapter will depend you know a lot on your understanding of the concept of required Reserve exess reserve and so on so let me just start um you know the chapter um by sharing with you a bit of background you know how this fractional Reserve banking system started so we have to go back into the history and see you know how all these uh system that we are adopting today uh exist in the first place so we're going to travel back um to the period whereby money was still yet there okay whereby you know people do transactions using gold for instance so this is what we call as the Goldsmith era okay just to simplify things we try to describe in the historical context and we call this as the Goldsmith era so what we are trying to highlight here is um during this period um you know people do transactions using gold and you know having this goal for transaction purposes uh creat some limitations uh number one is you know it's kind of heavy for you to carry uh you know the goal you know everywhere you know for you to do transactions and number two um you know with regards to safety um for you to carry here and there you know for you to travel you know it's pretty much um not safe and you know because of that reason uh you know many people you know started to deposited uh their goal you know with the gold smith so when we say Goldsmith this is basically safekeeper okay uh it's like a bank whereby the bank today going to accept your cash money you know as a deposits you want to safee keep you know your cash money in the bank so the basically going to act as the safekeeper but during that period when we are talking about gold as a medium for transactions you know people basically you know they're going to safekeep their goal with the gold smith so people who start their goal with the gold smith they will be given a receipt you know like a piece of paper describing about how much amount of gold being deposited with the gold as a proof you know for them to withdraw at the later stage for instance and because you know in the community more and more people started to deposit their go with the gold smith and you know almost everybody have gotten receipts with them you know which basically becomes a proof of how much of gold that they have deposited with the gold smith you know rather than they have to carry gold to do transactions they started to use these receipts okay that being issued out by the gold smith as a medium of transactions so they consider these receipts as money whereby when you want to make payment you're just going to pay using the receipts and the seller basically can claim you know certain amount of gold from the gold smith so it started to act you know as if that these receipts is considered to be currency okay during that time and of course you know in the beginning uh the total amount of receipts issued out you know when you total up the value what being stated on the receipt and you try to accumulate you know all the value of gold you know it will be exactly equals to the amount of value stated on the receipt when you total up okay the receipts you know that are in circulation in the economy and that is what we call as 100% Reserve banking system okay 100% Reserve banking system what does it mean it means you know whatever amount of receipts in circulation that would corresponds exactly equals to the amount of gold being deposited in the the or with the gold smith so it is one to one so all those receipts are fully back by gold okay so if the total amount of gold deposited let's say it amounts to 2 million for instance so if you add up all the value of receipts in circulation it should also be the same to the amount of gold being deposited which is going to be equal to 2 million okay that is what we call as 100% Reserve banking system and that was basically what really happens in the beginning okay uh so we are saying that all those receipts are fully backed by gold okay and because we consider that receipt as a medium of transaction so meaning that you know we are considering that receipt as money during that period but you know for the Goldsmith um how do they get profit from this well initially when someone deposited their go with the gold smith the Goldsmith will charge uh safekeeping fees okay that is basically where the Goldsmith make money from okay they're going to charge safekeeping fees but then you know um these Goldsmith you know they are capitalist you know they try to think of the better way how they can maximize their profit you know um so they started to realize that in every single time you know or at the end of the day for instance or at the end of the year you know there will be cases whereby you know some of the gold that had been deposited with them will not be redeemed okay uh probably you know the depositors you know uh pass away so most of the time you know the gold SM would have you know certain amount of gold left with them because not everybody who deposited their goal going to withdraw you know at the same time so at every single moment there will always be you know certain amount of gold you know inia vault which will not be redeemed or you know which will not be claimed you know by the people who had deposited much earlier so the ghost smth got an idea you know if people have started to trust um on the usage of receipts as a medium of transactions you know so on the part of the Goldsmith what what they can do is you know knowing that there will always be certain amount of gold that will not be claimed or Redeemed by the people might as well you know the gold smith issue out extra receipts okay as a way how to give out loans to the people why this is very important because we have to understand that receipt now has become you know a medium of transaction you know for people to transact people have trust you know in that receipts so anyone who carries that receipt it can be used for the purpose of transactions so on the part of the Goldsmith if you know they aware that there will always be certain amount of gold which will not be Redeemed by the people they might use that you know gold that might not be redeemed you know as a way how to give out as loans how do they give out loans you know they just need to write new receipts okay so when the Goldsmith started to issue out new receipts that is basically a process of lending okay that takes place back then okay so uh of course the deposit uh the the the the borrowers will have to pay back you know um the amount of of um goal you know at the latest stage and on top of that whenever the Goldsmith started to issue out new receipts as a lending uh that is also where the gold smith started to charge interest okay so the interest payment on loans come at a later stage okay so this is basically where or how the gold smith makes more and more money because apart from getting the uh safekeeping fees now they they they will also be able to get extra uh profit from the interest charge you know whenever they loan out um gold in the forms of issuing new receipts so those things started to take place you know back then so as I mentioned to you earlier you know given the amount of excess of gold unclaimed so the gold smith started to issue out new receipt you know as a way how to give out loans and they will make money from this because they're going to charge interest um so what really happened in this context is you know the total amount of money or the total amount of receipts in circulation started to become much larger and larger and larger as compared to the original amount of gold that being deposited with the Goldsmith because the Goldsmith you know when they issue out these new receipts you have to understand that that goal does not belongs to them okay that goals is basically belongs to the depositors so the go Smith is making you use of the unclaimed goal you know as a way how they make profit by issuing new receipts and this new receipts is basically no longer back by new amount of gold okay you are not talking about new goal being deposited you are talking about you know the existing goal that you have with the gold smith but now you start to issue new receipts in circulation so when you try to Total out the amount of uh total receipts in circulation the value of total receipts in circulation will be much much larger than the total amount of gold that we have you know in the system so that is where you know we started have do we started to have what we call as fractional Reserve banking system why it is now fractional Reserve banking system because the total amount of money in circulation which is based on the value of receipts in circulation is much much larger than the amount of gold that you really have in the system okay so only a portion only a fraction of the money that has been circulated in the forms of receipt are being backed by gold okay so now money in circulation is no longer 100% fully back by gold why because all these new receipts are basically being made you know out of nothing okay it is not really you know based on new additional gold being deposited it is basically coming from the same amount of gold that you have the only thing is that you know the amount of receipts have been increasing in the system because the Goldsmith started to issue out new receipts as a way how they make extra money by giving out loans you know to the U Community to the public for instance any questions so that is very important because that going to explain to us in terms of how we relate with our modern banking system okay so if we try to understand how this fraction Reserve banking system today exists or how is the workings of our banking system today it is basically based on the fractional Reserve banking system because why because whatever that you deposit into the bank that is basically your money you can consider that that is basically you know um if we want to compare it with the previous context we consider that as the goal that you deposited but now we no longer talk about gold we deposited our money you know in the banks when the banks receive your money you know they are profit maker they will not just keep that money idle you know in the banks in order for them to generate more profit they're going to make use of your money you know to loan out to other people so when they loan out to other people they also going to get you know interest uh paid you know by the borrowers that is basically how you know the banking system today makes money and that is why you know the banking systems today you know they would like to have much larger depositor base okay because why because when they receive more and more deposits that is where they can start to offer more loans you know as a way how to give out you know um money to people to borrow and as a way how they can generate their profits so in terms of the Char important characteristics of fractional Reserve banking system that we want to understand here is commercial Banks today the way how they create money it is basically through lending you know because whatever money that they lend out in the first place that money does not belongs to them you know that goal is basically does not belong to them when they started to print out new receipts for instance that new receipts is no longer back by the original amount of gold same goes in the modern banking system you know when they loan out money you know that money will not going to be totally back by the total amount of deposits received by the bank okay because why because they know at every instances you know people will not withdraw all their money at the same time there will always be certain amount of gold or there will always be certain amount of money you know with the banks so what we are trying to highlight here is you know under the fractional Reserve banking system the total new money created okay in the context of modern banking system we are saying that new money will be created when you give out loans okay it's no longer fully backed by Reserve so in the context of gold smith of course we are talking about go Reserve in the context of modern banking we are talking about the deposits the deposits you know by the depositors the money that you deposited in banks that is considered to be the reserve you know that the banking system receive you know in order for them to make use of those money to leave out as loans so what we have in our existing system of fractional Reserve banking system today is that there is possibility whereby the commercial Banks can create money in the system so why this is very important because earlier when we talk about the role of the Central Bank you know what is the role of the Central Bank the most important role of the central bank is to manage money supply or to conduct monetary policy okay knowing that under the fractional Reserve banking system the central bank is not the only one who create money okay the larger portion of money in circulations that we have today are basically made through this money creation by the commercial system so that makes it more difficult for the central bank to manage the amount of money supply in other words to be able to manage the amount of money supply the central bank will have to be able to control the money creation ability of the commercial banks that we have in the system okay there must be a mechanism in which the central bank can limit the amount of money or new money that can be created by the banking system and again when we talk about new money here we are not talking about printing money physically we are talking about making up the numbers in the accounts when I loan you out you know 10,000 for instance what I'm going to do I'm just going to transfer you know that numbers 10,000 now is available in your account so when you check your account yes you have 10,000 but the amount of physical money doesn't grow actually you know so they are basically creating new money out of th air okay out of nothing it is no longer back in the first place um in fact today we are using Fiat money okay so no longer gold is basically used to back up our currency okay so that makes thing much easier you know for um the bank to basically create new money in the system and around 90% you know or in the context of Malaysia 94% of money are basically created by the system by the banking system only 6% are the physical money okay the rest are basically created by the banking system through what we call as fractional Reserve banking system so what is the problem here you know another important characteristics is that under this fractional Reserve banking system the banks or the commercial banks are subject to what we call as Bank panics or sometime what we call as Bank runs what does it mean it means that there is a possibility in which when you want to withdraw your money from your bank the bank would say to you you know sorry we do not have your money because we had loan it out to the people you know and they have yet to pay back to us so we no longer have your money you know at this current juncture you know this will happen especially when all the depositors come to the bank at the same time to withdraw all their money in the existing scenario of course because not everybody going to withdraw at the same time you know Bank panics or Bank runs going to happen especially when all the depositors you know come to the bank at the same time and they wanted to withdraw all their money at the same moment you know that is where there will be possibility where the bank will tell you that sorry we don't have your money you know because your money had been invested or your money had been um loan out you know and we have yet to basically you know receive uh those payment from the borrowers for instance and when we talk about Bank panics or Bank runs this thing really happens in the real world okay this thing really happens in the real world so let me just share some of the um information with regards to you know Bank panics uh I think this is taken from um the web if I'm not mistaken Wikipedia okay I just want to highlight that even you know in the context of Malaysia we used to have the case of Bank panics in Malaysia so it happen in year 1999 there okay in the period of 1990s uh you can see here you know it's being highlighted the case whereby for the case of Malaysia long long time ago we had what we call as mbf Finance bad uh what really happened was that there were uh there was a rumor going around you know uh Countrywide saying that this mbf Finance going to go bankrupt okay you just imagine you deposited your money with mbf finance and then you know you got the rumors that you know this mbf Finance going to close down so you're going to be afraid of losing your money so what happened you know people rush to the bank to withdraw their money at the same time okay because of that rumors so um they could not fulfill you know the depositors withdrawals because some of those money are not with them at that time because some of those money had been used out to give out loans you know and they have yet to collect you know some of those so at the end of the day you know they could not fulfill the withdrawals of the depositors that is the scenario what we call as Bank panics and that was you know uh end of 1990s you can see how serious uh this could be especially during this period um where we communicate a lot you know using social media you know you can just pass on you know the information whether it is correct or wrong you know about a bank you know could go bankrupt and so on and that basically can lead to withdrawals um by the depositors and if the withdrawals happen at the same time okay that basically going to leads to bank panics um I think few years back when we had a case whereby you know people were um highlighting the case what really happened to tabong Hai okay uh M management of funds and so on um you know what worried us is basically you know the case where the depositors started to withdraw you know those money uh so uh that basically can affect you know the institutions itself um and of course you know if the depositors decided to withdraw all their money at the same time you know probably tabong could not also fulfill all those depositors um requests okay because some of those money had been invested you know somewhere else and so on so you know those kind of things could basically happen you know especially the context of fractional Reserve banking that we have today uh so you know this is one of the limitations you know the problem that we have in our modern banking system and this thing you know will not happen especially if we make use of goal you know real goal for the purpose of transactions so you know when you have this fat money this is basically one of the problems you know that exists you know because of you know you could easily create new money out of tin air because you no longer need to basically back it by certain amount of gold and you can also uh read through you know other instances of Bank panics the more recent one for instance you know in 2019 so you can see here I'm trying to highlight what happened to the case of Metro Bank you know in United Kingdom okay so there a rumor spread through WhatsApp that this Bank you know going to go bankrupt okay so what happen um people started to withdraw you know their deposits and the bank basically you know had lost around 24% of their customers you know all this basically refers to those people who you know withdraw their money uh you know because they are being afraid of that this Bank going to go bankrupt for instance so this is basically the case of Bank panics that we are trying to describe and I'm trying to show you some examples here to show that uh this case is basically u a real scenario okay it's not just based on Theory so that is why in the context of Malaysia you know or in uh anywhere in the country uh we always have have what we call as a guarantee uh in the context of Malaysia we have this agency pidm okay which basically U the role is basically to protect the deposits uh money okay when you deposits your money in Banks if you go to any banks in Malaysia you know they have to registers as a member of PM okay this is basically an insurance system okay meaning that in the case that the bank goes bankrupt you know you will still be able to um get your uh deposits your money you know from this PM so meaning that you know every banks in Malaysia they have to register and they have to pay you know certain amount of fees to PM you know as their insurer okay to ensure that in any cases anything happen you know the depositors money will still be protected and if you try to understand you know uh this PM I think it was established you know very recently uh 2005 2006 prior to that you know U the government doesn't uh guarantee you know whatever money that you have deposited in the Malaysian Banks you know uh it was not guaranteed so you know like what happened in the case of mbf Finance when they had to face that bank runs those people's money were not guaranteed because it was not insured okay only after that you know the government came up and set up what we call as pidm so that we have a much proper system that can ensure you know that the depositors money will be uh protected in any case whereby you know there is a issue with the financial banking system or whenever there is a bank runs okay so um okay so here it says that you know established in 2005 what really happened in the context of MB mbf Finance uh that was you know in 1999 okay so you can see you know uh some of the measures taken by the central bank and the government you know to ensure that you know the sound of the banking system and of course uh it is also very important for us for for people to have confidence in banking system you know otherwise the banking system will not be able to sustain you know investors where do they get the funding from from the banks if people do not deposit their money in the banking system you know the banks wouldn't be able to loan out money to the investors okay so sound financial banking system is very important giving uh strong confidence for the people to keep you know depositing their money in the banking system is also very important because that going to be translated into how much money you know will be um used for investment in the economy and so on