Posted on 03/29/2008 6:48:20 PM PDT by ovrtaxt
How is Money Created? |
The Federal Reserve Bank of Chicago used to publish a pamphlet entitled Modern Money Mechanics, which explains M1, M2, and M3. It is a truly fascinating read. That pamphlet is no longer in print, and the Chicago Fed has no plans to re-issue it. However, electronic copies are available (see link).
In it, the process by which the Fed creates money "out of thin air" is detailed. Consider the opening paragraph:
"Money is such a routine part of everyday living that its existence and acceptance ordinarily are taken for granted. A user may sense that money must come into being either automatically as a result of economic activity or as an outgrowth of some government operation. But just how this happens all too often remains a mystery." (Modern Money Mechanics, Federal Reserve Bank of Chicago, page 2)
Really read that paragraph.
The USFed, in one of its own publications, is stating right there in black and white that money is not created from economic activity, nor from a government operation. How then is it created?
"The actual process of money creation takes place in the banks." (Modern Money Mechanics, Federal Reserve Bank of Chicago, page 3)
The pamphlet uses an example of $10,000 being deposited from the Federal Reserve Bank to "Bank A" and shows how that develops into an increase in assets to the amount of an additional $90,000.
Essentially the Federal Reserve simultaneously creates an asset and liability of the same amount with a private bank. The net sum is zero. This money is "deposited" in the bank's federal reserve account. The private bank can then use this money as a reserve through which they can lend out additional money to the public. This reserve rate is generally 10%. Thus, a "deposit" of the USFed of $10,000 will transform into the private bank being able to loan out $90,000.
A couple of points.
Firstly, if I loaned your company $10,000 would the net worth of your company increase by that amount? The answer is no, because while assets went up by $10,000 so did the liability. It would be fraudulent for you to report an increase in net worth of $10,000.
Secondly, your company could not lend out $90,000 from the initial $10,000 you borrowed from me. You simply would not have the funds and if you claimed to have them, again you would be committing fraud.
Thirdly, I would like to take a quote from another Reserve Bank publication, this time from page 8 of Philadelphia's The National Debt:
"The Federal Government, with the cooperation of the Federal Reserve, has the inherent power to create money - almost any amount of it. This power makes technical bankruptcy out of the question."
So not only are the banks committing fraudulent activity in the sense that they claiming asset value from their debt and secondly loaning out more than they have borrowed, they are protected from any risk of bankruptcy courtesy of the public! You and I would pay more for prices of goods and services should the Fed have to dilute the money supply further by printing sufficient money to prevent bankruptcy of a bank!
This is nothing short of outrageous.
Published on http://DollarDaze.org - Jun 6, 2006.
Actually 9 times. Just putting money in the vault does not allow them to loan out more than their deposits.
Seriously.
Ask your bank manager Monday.
The truth is a bank can loan out less than 100% of their deposits. Not 900% of their deposits.
Really.
Do it. Be a bank. Or, open a Starbucks, but the bank would be a cheaper entry to the business world.
2) Beneath the words "The United States of America" and above the words "Two Dollars," mine also have Will Pay To The Bearer On Demand.
3) The words on the left side of Jefferson on mine state This Note Is A Legal Tender At Its Face Value For All Debts Public And Private rather than "This Note Is Legal Tender For All Debts, Public And Private."
4) The very small letters found in the corners of mine differ.
Because of your question, I checked to see who was in office in 1953; interestingly, at that time, George F. Humphrey was Secretary of the Treasury as opposed to Dillon and Ivy Baker Priest was as opposed to Granahan. Strange.
I think this goes to the "velocity" of money. Money lent out in one place becomes a deposit in the same place or possibly a different place. That deposit can then be lent out again and process repeats. In that way, a dollar increase in bank reserves become a $9 dollar increase in the economy. Unless of course no one is borrowing, then you are in trouble. That is what happened in Japan in the 90’s. No one was confident they could even pay back principle so they did not borrow, and the economy continued to shrink resulting in a debtors nightmare, deflation. That is what they are trying to avoid here as capital is destroyed by write-offs in the sub-prime mess.
Yes, but we're not talking about multiple deposits, we're talking about a single deposit.
Currency is something else entirely.
Where are you finding that distinction in definition between money and currency? I’m curious to see the reasoning behind it.
Just think about it.
There is a lot more money than there is currency.
I have $400 in currency right now, but I have a lot more money.
Banks and people create money. The government prints and stamps currency.
There’s no functional distinction between currency and any other form of money in a monetary regime like the current one. It’s all credit money.
Some of these posters are using ‘money’ in the sense that Mises used, where convertibility into gold is what made a currency issue ‘money’ as opposed to credit money. Credit money under a gold regime has the ability to contract or vanish during a deflation.
I dunno... ask Madeline's old buddy. I hear he "creates" it...
Let’s just cut those reserve requirements back to %5 max. But I’ll invest in your bank before that 5% requirement become effective.
Interesting info. I wish we were using those instead of Federal Reserve notes.
Thanks for explaining that. I’ve been trying to put that idea into words, but I wasn’t sure my explanation was correct.
I beg to differ, we’re still talking about what happens to the initial deposit, and what it catalyzes and effects as it’s redeposited.
Any idea what they’re worth? $2 in silver, or more to a collector?
It’s still legal tender. It’s still worth $2.00
So you can buy a bit more than half a loaf of bread with it.
I’ve always been fascinated with the first real bankers, the Knights Templars. Their pioneering work contributed greatly to commerce.
http://en.wikipedia.org/wiki/Knights_Templar
Although the primary mission of the Order was military, relatively few members were combatants. The others acted in support positions to assist the knights and to manage the financial infrastructure. The Templar Order, though its members were sworn to individual poverty, was given control of wealth beyond direct donations. A nobleman who was interested in participating in the Crusades might place all his assets under Templar management while he was away. Accumulating wealth in this manner across Europe and the Outremer, the Order in 1150 began generating letters of credit for pilgrims journeying to the Holy Land: pilgrims deposited their valuables with a local Templar preceptory before embarking, received an encrypted document indicating the value of their deposit, then used that document upon arrival in the Holy Land to retrieve their funds. This innovative arrangement may have been the first formal system to support the use of cheques; it improved the safety of pilgrims by making them less attractive targets for thieves, and also contributed to the Templar coffers.[4][14]
Based on this mix of donations and business dealing, the Templar established financial networks across the whole of Christendom. They acquired large tracts of land, both in Europe and the Middle East; they bought and managed farms and vineyards; they built churches and castles; they were involved in manufacturing, import and export; they had their own fleet of ships; and at one point they even owned the entire island of Cyprus. The Templar arguably qualifies as the world’s first multinational corporation.[13]
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