[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

pay their workers. How could the local economy react to these sorts of financial
disturbances?
Each area adapted in its own way. Let’s consider Atlanta. 2 The city printed about
$2.5 million in scrip, in eight different issues, during the first half of the 1930s. One
of the first payments was to schoolteachers, and the city made sure that Rich’s, a
prominent local department store, would take the scrip at full face value. Many other
stores, however, would count the scrip only at 75 percent or less of face value. Note
that by taking scrip, which it would later turn in to the city for cash, stores were
effectively lending money to Atlanta, which had issued the scrip.
Such stories of scrip may sound antiquated today (though in its 1992 financial
crisis, California paid its workers with something akin to scrip). But they emphasize
the fact that without something to serve as a medium of exchange and a measure
and (short-term) store of value, an economy simply cannot function. Today the Federal
Reserve acts to ensure that currency is available. But in the 1930s, issuing scrip was
one step a city could take on its own to cushion the ravages of the Great Depression.
Creating Money in
Modern Economies
Banks have long played a key role in the financial sector. Indeed, today’s money
supply is created not by a mint or a printing press but largely by the banking sector.
The money supply consists not only of the cash we carry but also the deposits in
our checking accounts. The total level of deposits in the banking system is an important
part of what we mean by the money supply. Whenever you make a deposit to or
a withdrawal from your checking account, you are potentially affecting the overall
quantity of money.
When you put $100 into the bank, the bank does not simply put it in a slot marked
with your name and keep it there until you are ready to take it out. Banks know that
not all their thousands of depositors will withdraw their money on any given day.
Some people will withdraw their money in a week, some in two weeks, some not for
a year or more. In the meantime, the bank can lend out the money deposited and
charge interest on the loans it makes. The more money the bank can persuade people
to deposit, the more it can lend out and the more money it will earn. To attract depositors,
the bank pays interest on some of its deposits, effectively passing on (after
taking its cut) the interest earned on its loans.
MONEY IS WHAT MONEY DOES
What do bank deposits and loans have to do with the total amount of money in the
economy? When we talk about money, we often mean much more than just currency.
In speaking of how much money someone makes, we are really referring to
2 See William Roberds, “Lenders of the Next-to-Last Resort: Scrip Issue in Georgia During the Great Depression,”
Economic Review of the Federal Reserve Bank of Atlanta, September–October 1990, pp. 16–30.
CREATING MONEY IN MODERN ECONOMIES ∂ 615