My point on electronic funds was to drive home that it would obviate any need at all for a bank to hold any reserves. Since only electronic transactions would occur no physical currency reserves need be held - just the entries. No more bank runs could occur since there isn’t a limit to electronic bits.
Why is only the fed allowed to “create” from an entry - why couldn’t any bank based on this argument at any point in time create currency with an electronic loan/deposit? Isn’t the Fed privately held - I know it’s “quasi-governmental” but that’s always been a shadowy screen at best...so why do they get special allowances not afforded to other banks?
The only reason you would need starting capital is to put the system in place. They could even start up by loaning the owners money first to create the first loan/deposits.
“Why is only the fed allowed to “create” from an entry - why couldn’t any bank based on this argument at any point in time create currency with an electronic loan/deposit?”
Local banks create money by doing that all the time (not currency, currency is paper money). When your local loan officer gives you a loan, she does it by crediting the amount to your checking account. This isn’t money coming out of a pile of money in the bank’s vault, it is credit money created by the bank. The bank has to have a small amount of reserves backing that loan (that’s what “fractional reserve lending” refers to), but it’s not anywhere near a dollar of reserves for each dollar loaned. Probably more like a dime or a nickle of reserves per dollar.
If you tried a system without reserves you would get powerful pro-cyclical monetary expansion during boom periods followed by devastating collapses, because you would have removed all restraint and incentive to check the quality of the loans you were making. Something like this happened to create the housing bubble, driven by “shadow bank lending” outside the Fed system.
Banks hold a lot of illiquid paper. They loan you money, you give them your promise to pay. That promise has financial value, but it’s not liquid money. If all of their customers wanted their money out all at once the bank would be in a lot of trouble because so much of their money is tied up in those loans. What the Fed can do is purchase that loan paper from banks, giving them liquid cash that they can hand over to their customers. Otherwise the bank being hit by the run would collapse.
“Isn’t the Fed privately held - I know it’s “quasi-governmental” but that’s always been a shadowy screen at best...so why do they get special allowances not afforded to other banks”
Before the Fed, the Morgan Bank performed the same functions as the Fed. When the banking system was in trouble the Treasury asked JP Morgan to save the country. Morgan was entirely private, there was no oversight. But some of what Morgan had to do was in a legal grey area. And the American economy was getting much too large for a single bank to bail it out. Morgan was behind the creation of the National Monetary Commission, a study group which recommended to Congress the creation of a central bank to act as lender of last resort. So the roots of the Fed came entirely from the private banking world. But the Fed has more accountability to Congress and the public than the preceding system.
The member banks don’t “own” the Fed. They are compelled to belong and they have to pony up money to do so. They do have a big voice in how it is run. If anyone “owns” the Fed, it is the US Treasury, because they get all the money the Fed earns over the basic cost of salaries to run it. I suppose the Fed more resembles the MLB or the NFL- an umbrella organization that everyone has to belong to.