Economics Questions

Re: How exactly does the Federal Reserve Create Money?

Ricky James Moore II — Wed, 09 Feb 2011 02:58:06 GMT

Expansion of the money supply is achieved almost entirely by credit expansion, which the banks are de facto free to do without regard to reserves or the Fed. See here or the shorter version here, for example. The Federal Reserve exists to bail out the FDIC and institutions which owe the banks large sums of money, should they become insolvent, so the banks do not collapse. The monetization of the debt will only expand credit if it exceeds the rate at which banks contract credit, which is what they are doing right now. Robert Murphy is starting to come around to this point of view, such as here.

I think the 'traditional' Austrian view on the business cycle and the Fed is too mechanical, and too 1940s, to be accurate to todays realities. The general theory of credit expansion resulting in malinvestment, of course, I agree with totally.

Re: How exactly does the Federal Reserve Create Money?

tcostel — Tue, 08 Feb 2011 23:17:31 GMT

@Ricky

So the Federal Reserve does not purchase assets?And what do you mean by socializing losses? Also, how does it fund government unless it increases the amount of money in circulation?

Re: How exactly does the Federal Reserve Create Money?

Ricky James Moore II — Sun, 06 Feb 2011 13:42:30 GMT

The Federal Reserve doesn't creat money. Expansion of circulating credit is in the hands of the banks, and has been since the 1990s. The Fed exists to socialize losses and fund government, in terms of the business cycle it is entirely in the hands of the state-protected private sector of large banking houses.

Re: How exactly does the Federal Reserve Create Money?

John James — Sat, 05 Feb 2011 22:46:50 GMT

That was actually as decent an explanation as could be expected from such a short entry, and it does cover the meat of it. However it is obviously much more complex and there is a lot more to it. If you'd like to know the details of how it all works, check out Rothbard's Mystery of Banking (see below)

But yes, you've basically got it. The Fed buys everything it buys by simply increasing the reserve amount on the books of the bank it buys from. They get assets from a bank, and in return they just enter some numbers in an account and say "bank A now has $x more in reserve with the Fed." Then the money supply grows more in a second step called "fractional reserve banking." This isn't done directly by the Fed, but it is still part of the Federal Reserve System. Basically banks are able to use those new reserves as the basis for the creation of more "checkbook money"...because remember, a bank only has to hold 10% in reserve (or whatever the reserve requirement is at the time). Here's a short list of resources:

Articles:
Is Our Money Based on Debt?
The Fed as Giant Counterfeiter
Do Non-Banks Create Money?

Books:
What Has Government Done to Our Money?
The Mystery of Banking
The Creature from Jekyll Island

Videos:
A Second Look at the Federal Reserve
Fiat Empire – Why the Federal Reserve Violates the Constitution
Money, Banking and the Federal Reserve (HQ) (download here)

Re: How exactly does the Federal Reserve Create Money?

tcostel — Sat, 05 Feb 2011 21:11:32 GMT

Thanks everyone, I think I understand it now. It just seems like such a ridiculous process to create money like that.

Re: How exactly does the Federal Reserve Create Money?

Stranger — Sat, 05 Feb 2011 16:47:55 GMT

They just say they're good for it.

Seriously, that's how modern banking works. All credit. Open your wallet, look at a dollar bill. It says Federal Reserve Note. All this means, is that the Federal Reserve claims they're good for it.

Re: How exactly does the Federal Reserve Create Money?

mwalsh — Sat, 05 Feb 2011 13:38:06 GMT

The FED has 1 main method of creating currency, and that is buying assets from Banks(almost exclusively). When the FED buys said asset, typically US Treasury bills/notes, it takes the asset, puts the asset on the FEDs balance sheet, and electronically pays the seller buy adding "money" to the bank's account at the FED.

This is the new money added- and banks can have ~10x the liabilities as assets, so for ever dollar the FED gives to the bank, 10 dollars "appear" in the economy, beacuse the FED takes in a "real" asset- really a part of the gov't debt, and liqufies it into X dollars.

To reduce the amount of "money" the FED just sells the Treasury Bill/note to a bank, taking in its money.

Re: How exactly does the Federal Reserve Create Money?

tcostel — Sat, 05 Feb 2011 12:09:21 GMT

The way the Fed works I doubt they would hire someone who actually knows what they are doing

Re: How exactly does the Federal Reserve Create Money?

Isaac "Izzy" Marmolejo — Sat, 05 Feb 2011 10:23:46 GMT

just google "how the fed creates money" ... works like a charm

Re: How exactly does the Federal Reserve Create Money?

Laotzu del Zinn — Sat, 05 Feb 2011 07:34:40 GMT

If you fully understand it, write the FED a letter.. they'll probably hire you

How exactly does the Federal Reserve Create Money?

tcostel — Sat, 05 Feb 2011 06:54:59 GMT

I know this must have been asked before, but it is a topic I still cannot wrap my mind around. From start to finish, how does this happen? Who gets the money? I know it has something to do with the Fed buying securities of some sort, and the money used to purchase them is created out of thin air. But what exactly is the process, and how is the amount of money created determined by the whole process? Thanks.