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Money in the Modern World

Josef Jílek and Roman Matousek

The book explains the framework of the money, liquidity and monetary policy in the USA, the Eurozone, Japan, and the United Kingdom. Even if the book is based on contemporary banking practice, it arises from careful examination of the historical development of opinions on money, liquidity and monetary policy. The authors claim that money and liquidity (and the financial system as a whole) are demonstrated best through financial statements (balance sheet and income statement) which are based on accounting. Thus any operation is clarified through double-entry record. Furthermore, the fundamentals of the payment systems are outlined.

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Preface .................................................................................................................. 9 Acknowledgements............................................................................................ 11 Part I: Money..................................................................................................... 13 1 Money as monetary aggregates................................................................. 13 1.1 Definition of Money .............................................................................. 13 1.2 Monetary aggregates ............................................................................. 16 1.3 Monetary aggregates in the USA .......................................................... 17 1.4 Monetary aggregates in the Eurozone ................................................... 19 1.5 Monetary aggregates in Japan ............................................................... 20 1.6 Monetary aggregates in the United Kingdom ....................................... 21 2 Creation and Extinction of Money I......................................................... 22 2.1 Where, how and when does the money create and become extinct ...... 22 2.2 Loans granted by banks to non-bank entities ........................................ 26 2.2.1 Principles of money creation through loans ................................... 26 2.2.2 Primary and secondary allocation of money .................................. 31 2.2.3 Impaired loans ................................................................................ 32 2.2.4 Corporate loans............................................................................... 36 2.2.5 Household loans.............................................................................. 37 2.2.6 Finance lease................................................................................... 38 2.2.7 Legal environment .......................................................................... 39 2.2.8 External credit rating ...................................................................... 39 2.2.9 Internal credit rating ....................................................................... 42 2.2.10 Information about the borrower’s financial conditions.................. 43 2.3 Interest paid on deposit and other liabilities of banks to non-bank entities.................................................................................................... 43 3 Creation and Extinction of Money II ....................................................... 46 3.1 Assets and services purchased by banks from non-bank entities.......... 46 3.2 Buy back of banks’ own securities from non-bank entities .................. 48 3.3 Payments of wages and salaries to bank employees, management and statutory individuals ....................................................................... 50 3.4 Payments of dividends and royalties ..................................................... 51 3.5 Extinction of money .............................................................................. 52 3.5.1 Repayment of loans to banks by non-bank entities........................ 53 3.5.2 Assets and services sold by banks to non-bank entities ................. 55 3.5.3 Issue of banks’ own equity and debt securities to non-bank entities............................................................................................. 58 3.6 Payments between clients of one commercial bank.............................. 60 63.7 Domestic...

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