Luottoraha

Luottoraha is a Finnish term that translates to credit money or loan money. It refers to money that is created through the process of lending and borrowing. When a bank grants a loan, it essentially creates new money in the form of a deposit in the borrower's account. This newly created money is not backed by any physical commodity like gold but by the promise of future repayment.

The concept of luottoraha is central to modern fractional-reserve banking systems. Banks are only required to hold a fraction of their deposit liabilities in reserve, allowing them to lend out the majority of the funds deposited with them. This lending process expands the overall money supply in the economy. While luottoraha facilitates economic activity by providing liquidity and enabling investment, it also carries inherent risks. The expansion and contraction of luottoraha can influence inflation, economic growth, and financial stability. Central banks play a crucial role in managing the creation and supply of luottoraha through monetary policy tools such as interest rates and reserve requirements. Understanding luottoraha is key to grasping how modern economies function and how financial systems create and manage money.