Tuesday, August 10, 2010

Does the Fed Create Money? A Clarification

Excellent comment by Ralph Sampson, over on Ellen Brown's blog, explaining exactly what is meant by the Fed creating money.

"From my perspective Ellen explains the monetary system well but she periodically injects points of confusion. Here is an example: she says the Fed prints federal resereve notes and lends them to the banks at interest and the banks in turn lend them to us. This is sort of true but not really.

The Fed creates some paper currencey (Federal Resereve Notes) but that is a small part of the money created by the banking system. (Even that is not true. The Fed orders the notes from the mint, more specifically the Burea of Printing and Ingraving, who creates them and charges the Fed for the service.)

The main concept is that the Fed authorizes, and sometimes creates, reserves that the member banks then use as an insurance pool to back the bookentry loans (making money out of thin air) they in turn make to legal entities which are made up of individuals and non flesh-and blood-legal entities.

To just casually say the Fed prints federal reserve notes which it lends is the principal paradigm of the monetary system is, again, just not true and confuses the readers trying to understand that system.

Most of the circulating money is credit, not currency and coin, where credit is the term for purchasing power in the form of entries in a financial journal that, these days, takes the form of computer bits in a digital memory somewhere."

1 comment:

sanya said...

Great detailed post! Its very informative to most of them.Also, i am really applaud of you for making this post.