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.
Todd, we were discussing this the other day- the mechanics of fractional reserve banking, the loan to deposit ratio, etc. The Chicago Bank’s handbook looks like an interesting read.
Very interesting article here. I’ve been looking for an explanation of how central banks actually work.
This is the way it has always been and the way it will always be until the collapse of the free market economy and this country.
Get used to it.
Well, that depends on if you’re talking about real money, or fiat paper “reserve notes”. Banks and the fed don’t create any real money at all.
bump for later read
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?
Rich people know this.
If you would care to embrace this, you too may be rich.
The thing is, not only can money be created “from nothing” as it were, but money can also be extinguished. An inadvertent example would be the huge gaping, leveraged hole where Bear Stearns once stood.
Thanks for the link.
Money? As in U.S. Dollars?
North Korea cranks it out on a printing press.
And we do nothing about it.
I would suggest that you check out the pamphlet itself, linked in the post. I haven’t read it yet, but I intend to. Looks interesting.
Bump for later read.
Hopefully there will come a day when central bankers are found hanging from lamp posts like Mussolini, but I think we need the whole system to collapse for that to happen.
Bookmark.
ML/NJ
I don’t think people will ever fully realize it. Some will, but probably not joe six-pack.
Keynes said this, quoting Lenin:
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens...There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” (John Maynard Keynes)
I've never gotten a big chunk of CASH from a bank. I've gotten big electronic transfers to my account and big checks.
Those ones and zeros, and those slips of paper with "Pay to the order of" in front of my name are created money.
$10,000 in cash money in the vault allows them to back $100,000 in loans, issued in the cash "equivalents" of a note in my deposit book.
And we do nothing about it.
At this point, I would be less than astonished if we outsourced the printing of our currency to DPRNK.
*sigh* That would be something.
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