The Creation of the Federal Reserve System (Part 2)

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Cenydd
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100 thousand percent incorrect. Primary Dealers don't make money out of thin air.

Only the Fed can create reserve money out of thin air. This has been proven to you in our discussion. You have acknowledged it and admitted it. How could you now say Primary Dealers create money out of thin air?

The money in your bank account is only a claim on the bank's reserves, and is money only in the sense of a broader meaning of money that includes bank accounts.

Nothing I say can disprove what you said because in your head you aren't open to learning.

And the fact that every informed member here, every reliable article on the internet, and reason and logic all contradict your position doesn't phaze you in the lease. You have already made up your mind how the system works and there is absolutely nothing anyone in this world can do to change your mind.

 

I have absolutely no idea where you are going with this.

What's wrong with saving? It allows private capital formation so that people don't have to go into as much debt to buy things they want. Your idea of inflating the money supply to encourage people to spend has failed many times over the last 9 decades. You can't artificially create conditions that force people to do things economically that they wouldn't normally do without some consequences occuring in the future.

I disagree that saving money is the worst thing that can happen to an economy. You don't think hyperinflation is worse? What about Depression?

I know. I was assuming that we were talking about high velocity situations during economic prosperity.

Why should our "target growth" be dictated by bureaucratic formula?

We've already been over this. When the government spends money, it has to allocate its resources from the private sector. It does not create any wealth, it simply transfers it from one sector of the economy to another sector. Gov't spending is a way for real GDP per capita to become artificially inflated.

Good for you. You're still missing the point that govt jobs on average make way more money than private jobs, becuase govt can always outcompete its private competition. It has an effective monopoly on any sector of the economy it chooses to "compete" in.

You have demonstrated nothing except a severe lack of knowledge on how money is created and how the banking system works.

No. I said the rate of growth of RE(GDP-Govt)/capita from 1971-present has been half of what it was between 1929-1971.

Your random personal attack has been noted.

More baseless claims.

They had papyrus. But it doesn't matter...they could have easily found something just as worthless as paper is today and used it for currency, but they didn't. Why do you suppose that was?

Sure there is. When I have money in my wallet, it's likely that it's going to be spent relatively soon. When it's in a deposit account, particularly a savings account, it's not so likely to end up in circulation any time soon. Also, when it's in a deposit account, it's digital FRN's, whereas in my wallet, I have physical FRN's.

Your random personal attack has been noted.

100 trillion percent incorrect. Banks do not create moeny out of thin air. They multiply deposits. Primary dealers do not create money out of thin air.

I agree that it's money only for the reason that federal legal tender laws exist. If those laws were repealed by a single act of Congress and the President, I would disagree that FRN's are "money".

Your random personal attack has been noted.

It's not a question of making up my mind about how the system works. It's not a question of one's opinion, it's a question of fact. Your facts are wrong, and it was very illogical for you to make this claim.

Your random personal attack has been noted.

Your random personal attack has been noted.

No. Only the Federal Reserve adds new money to the money supply. Proven to you countless times by multiple people.

So you think that if population increases, then demand for goods and services will go down? Stay the same? There is zero logic in this claim.

You totally missed the point I was making. I'm not advocating for a fixed money supply because that would require government control over the money supply. You should understand that I would be against that, but for some reason this little fundamental bit of logic slipped your mind. If gold was used as money and its supply was fixed by the government, it wouldn't force the government to coin clip "because there isn't enough gold to satisfy the country's wants", becuase prices and wages would be falling and the purchasing power of the gold would be going up. I'm saying that the reason you gave for why governments coin clip is 100% wrong.

Your random personal attack has been noted.

 

Really Iriemon? Really? Banks do not create money out of thin air? So this paper from the Federal Reserve Bank of Chicago called Modern Money Mechanics which states...

"The actual process of money creation takes place primarily in banks.(1) As noted earlier, checkable liabilities of banks are money. These liabilities are customers' accounts."

is lying? So you know more about the banking system than the actual banks? Hmmmmmm... I wonder who I will believe.

Source: http://www.rayservers.com/images/ModernMoneyMechanics.pdf

How much clearer can I make it??

The fact that you are arguing about one of the more simpler concepts in our system makes everything else you say moot. Until you can realize that banks do in fact create MONEY out of thin air we can no longer converse, because it would be worth anyone's time and you would be feeding false information in to readers.

And I would like an apology!

 

You and I don't agree often, but I have proven this very fact to Iriemon several times, but I cannot say that I am suprised that he still continues on in the face of facts.

 

I didn't say there is anything wrong with it, I said it's the worst thing for the economy.

What do you think causes depressions and recessions?

What formula would you use?

And you've been wrong about this every time you've said. Continuing to repeat it doesn't make it any more right than the previous time.

No it doesn't. Because if the private sector can pay higher wages than the Govt will lose. They effectively make the private sector pay decent wages. What is so wrong about that? Why do you hate the laborers in this country?

The fact that I have laid it out and basically drawn out the system for you and you still think you are right is amazing.

And we were using the same system between 1934-1971. We have gone over this point 100 times also. You are going to say stuff about silver certificates and the Bretton Woods system and then we are going to go in circles. I can't say any insults, but trust me... I am right.

Gold was the easiest thing to use for currency. Who cares, it was simple. Now printing paper is easier than lugging around a useless metal. What's the difference? Absolutely nothing!!!

You are just back tracking here. You said that deposits are not in circulation. I spend much more money out of my deposit accounts than I do cash. I rarely ever use cash to do anything with these days. So that debunks your point that the Govt can't create money by creating deposits.

Deposits = Money. And yes banks and primary dealer banks most definitely do create money out of thin air. This is basic banking 101. I don't know how you can get any further in your knowledge of the system if you do not understand how the banking system works.

It doesn't matter what you believe money is. It matters what the state says money is. And they say our money that represents this country and is the money used to pay our taxes is FRN's. So yes, it is money. And yes, even if they got rid of FRN's they would still have to create some uniform money in which we pay our taxes in. I don't know why you believe multiple currencies would ever have a chance to work in America. That is a destructive idea.

Lol, keep saying it. The funniest thing is I know I'm right and I can prove I'm right. You are the one denying the facts when there put right in your face. You have yet to even describe why what I'm saying is wrong. You just stick to your talking points.

This is so incorrect I don't even know where to go from here. If you can't understand how the banking system adds new money to the money supply than we should not converse any longer. It is one of the most basic concepts of our banking system and if you don't believe this simple concept than you aren't ever going to understand what I am saying.

It doesn't matter about the population it matters about money. If the population increases but qty remains stagnant and velocity decreases, than yes there will not be an increase in demand. It's about money, not about population.

So you are saying the Govt didn't clip coins because they wanted more money? And to be honest I really don't care about this example since it has nothing to do with our current system. It is just another one of your irrational fears for the Govt.

 

We definitely have our differences, lol. But it's good to see we are on the same page on this one. Iriemon's entire theory on how the system works is completely broken down because this one concept. Banks most definitely create money from thin air.

 

And Primary Dealers DEFINITELY purchase Govt debt with money created from thin air, and the Govt DEFINITELY credits our accounts with this money, and we DEFINITELY have the money before we ever have to "fund" the Govt.

People are chasing the wrong tail here. The Govt determines how much money we have, not the Fed. The Fed determines how expensive it is for banks to lend money.

 

Iriemon... Page 9, Modern Money Mechanics

"Deposit expansion can proceed from investments as well as loans. Suppose that the demand for loans at some Stage 1 banks is slack. These banks would then probably purchase securities. If the sellers of the securities were customers, the banks would make payment by crediting the customers' transaction accounts, deposit liabilities would rise just as if loans had been made. More likely, these banks would purchase the securities through dealers, paying for them with checks on themselves or on their reserve accounts. These checks would be deposited in the sellers' banks. In either case, the net effects on the banking system are identical with those resulting from loan operations."


I don't get how I can get any clearer than this. When the Primary Dealers purchase Govt debt from the Treasury it is no different from a bank giving you or I a loan. They are CREATING money out of thin air to purchase this debt.

 

Of course it takes place primarily in banks. The Fed is the entity creating the banks' reserves, not the bank. The banks themselves have no power to create any new money. They only create new deposits and loans.

 

Let's create a hypothetical economy that consists of many borrowers/depositors, a single bank, and the Fed. Let's say that the required reserve ratio is 10% and the Fed creates $10.

The $10 ends up as a deposit in the bank. Since the bank is only required to keep 10%, they loan $9. $9 is now in circulation. That $9 comes back in as a second deposit. The bank can loan $8.10 of it, and $8.10 is now in circulation. That $8.10 comes in as a third deposit and the bank loans out $7.29. $7.29 is now in circulation. This keeps playing out until the bank has multiplied its deposits by 10 times the original amount of money that was created by the Fed, and they can make loans and collect interest on up to 9 times that original amount.

The only thing the banks have created are deposits. There is never any more money in circulation at any given time than the original $10. They have created no money.

 

How did the Fed create $10? What asset did they purchase?

Did they give this $10 to a person or did they just give $10 in reserves to the bank?

So the banks balance sheet would look like
A | L
Excess Reserves $10 | ???

So the banks balance sheet is now this. Notice how this doesn't make sense unless there is a deposit created before hand

A | L
Required Reserves $10 | Deposits $100
Loans $100 | ???? Equity?- $10

Deposits are money. They just created $100 in money. We can all spend are deposits just like they are cash. There is now $100 transacting in the economy from a $10 reserve deposit by the Fed.

And this assumption is making the case that the Fed can simply create money with out taking any collateral in return. So the original premise of this is already wrong. The Govt would need to issue $10 in debt first before the Fed could create $10 in reserves to exchange the banks.

DEPOSITS ARE MONEY!! If you don't believe this than you aren't going to understand anything I'm saying.

 

According to the banking system, deposits are money. I will listen to the banks and the Fed before I listen to you or Iriemon.

"The actual process of money creation takes place primarily in banks.(1) As noted earlier, checkable liabilities of banks are money. These liabilities are customers' accounts."

Source: http://www.rayservers.com/images/ModernMoneyMechanics.pdf
Page: 3
Written by THE FEDERAL RESERVE BANK OF CHICAGO

So you are telling the Federal Reserve that they are wrong?

 

And this is the chicken and the egg approach to how a hypothetical country would start like us. But regardless of how it starts whether the Fed creates $10 and gives it to the banks or the bank creates $10 in deposits and gives it to the Treasury, the bottom line is Congress has to decide to spend $10 in order for $10 to be created. So in the hypothetical world, Congress would decide they wanted to spend $10 and give it to someone to build a gun.

So this is where the chicken or the egg happens. But it really doesn't matter whether the Fed creates the $10 first or if the Primary Dealer creates the $10 first. Regardless, the Primary Dealer is going to give $10 to the Govt. The Govt is going to give $10 to the gun builder.

Now what has happened?

The Primary Dealer's balance sheet looks like
A | L
Treasury Debt - $10 | Deposits - $10

The Govts balance sheet
A | L
Neg Equity - $10 | Treasury Debt - $10

Now the dilemma here is that the deposit can not be used in our current system. The banks do not have any reserves or currency for the gun builder to exchange their deposit. But the DEPOSIT IS MONEY. The gun builder has $10.

Now what the Fed would do is purchase the Treasury Debt from the Primary Dealer to create a form of money that is usable by the gun builder. So the Primary Dealers balance sheet would look like
A | L
Reserves/Currency - $10 | Deposits - $10

The Fed would look like
A | L
Treasury Debt - $10 | Reserves/Currency - $10

When all is said an done, all that was created was the $10 the Govt wanted to spend to build a road. The Fed's job is to make this $10 usable in the real economy, but the Govt created $10 in order to give to the gun builder. Money creation stems from Congress not from the Fed.

 

Saving is not the worst thing for the economy. A decrease in real private GDP per capita, an increase in U-5 unemployment, and price inflation are all worse for the economy than people saving their money.

People saving money does not cause depressions and recessions.

Asking me that question implies that a forumula should be used in the first place.

That discussion is not over:

http://www.politicalforum.com/polit...oes-your-money-come-contd-35.html#post4908176

Or it can just keep raising wages of its employees like it has been doing.

It artificially raises the cost of employment, which drives unemployment up. It also causes many businesses to fail because they can't outcompete the government. This also drives unemployment up. Why do you hate laborers in this country?

Your say-so is not good enough. The dollar having any link to gold or silver means it was a fractional reserve standard. Your opinion has very little to do with it. You're wrong.

I care. Now tell me, what made it the "easiest thing" to use for currency?

Of course it's easier. It requires almost zero labor to print paper, just like it requires zero labor for me to go outside and pick leaves off my trees. Why do you suppose that such "unsophisticated" and "stupid" people that used gold for money didn't figure out that they could just pick leaves off trees and use them for currency instead?

You've already admitted at least one difference: people wouldn't accept fiat currencies in the absense of legal tender laws. Fiat currencies never survive. There is zero evidence of any non-negligible recessions and depressions happenening when a true gold standard is used.

I said deposits aren't necessarily going to be in circulation any time soon. I could put money in my checking account and let it sit there for 50 years. Why would we automatically consider that money to be "in circulation"?

Multiplying deposits does not create money. It only expands the bank's liabilities. Depositors cannot spend more than the bank has in reserves. The reserves never exceed the intial amount of money the Fed has created.

If all depositors tried to withdraw their money from the bank at the same time, the bank would not have enough money to service all depositors. That means deposits do not necessarily = money.

Banks do not create money out of thin air. Only the Federal Reserve can create money out of thin air. You're still making stuff up.

Yep. It's called the Dollar.

Disproven hundreds of posts ago.

You haven't presented any facts which disprove anything I am saying.

The banking system does not add any new money to the system. It only adds new deposits. Deposits do not necessarily equal money. Proven by people who lose their life savings when banks get run on. If banks could create money, then nobody would lose any money if a bank got run on.

Absurd claim. Money has absolutely nothing to do with it. If population increases, there is going to be more demand for food, water, and shelter. It doesn't matter what the money supply is, or what the velocity of money is. No matter how hard you try to convince yourself of this, it doesn't change facts.

No, I'm saying that they did coin clip because they wanted more money that they couldn't get because they didn't want to raise taxes. The reason you gave was wrong.

Sure it does. Printing money is just a more sophisticated method of coin clipping.

 

It wouldn't, but Primary Dealers can't create money. They don't control the money supply. The Fed does.

 

Which all happen because people stop spending (aka saving).

Mathematically yes it does. Only in your head does it not.

I don't deal with philosophical crap

Great, laborers getting paid more money. What a travesty!!

What is artificial about Govt employing people? Are they making artificial incomes? Are they producing artificial goods? You are making no sense.

They stopped producing any convertible currency in 1934. Your opinion has very little to do with reality. You're wrong

Because it was hard to tamper with, it didn't provide any other material uses, and it was almost impossible to destroy, and it was easy to keep track of.

Who cares about the labor it takes to make a medium of exchange

That's because there wouldn't be enough structure and no control over it. That is why uncivilized societies still trade chickens and cows.

I can put money in a safe and let it sit there for 50 years. What is the difference?

And creates assets for the private sector... aka creating money. Unfortunately the banks say that they do create money. I will take their word over yours. If you are not even going to believe what the banks say they do, then there is no hope that we can ever get to a conclusion.

If all depositors tried to spend their money electronically there would be enough money. And since more people purchase things electronically than with cash, then you don't really have much of a point.

I showed you a quote directly from the Federal Reserve Bank saying that banks create money. If you aren't going to believe banks when they tell you they create money than I don't know what to tell you. I guess everyone is making this stuff up except for you.

This is a logical fallacy. The money isn't "lost" when a bank fails. It is used to pay off the loans and debt of the bank. Which still means that your deposit is money. And you keep saying they do not add money yet they say that they do. Are you saying the banking system is lying to all of us?

No, there will be more people who want food, water, and shelter. But if they don't have the money or means to get it there will not be an increase in demand.

Incorrect, the reason I gave was right

Not if it leads to more productivity

 

This is getting old Iriemon. I already showed you that it does create money and I showed you sources from the banking system itself saying that banks create money. I even showed you a source that when banks invest in securities it is nothing different than a loan.

If you aren't going to believe what the banks are telling you, than I don't know what to say. You can continue on believing whatever you want. But it is embarrassing.

The Fed tries to manipulate the money supply based on how much the Govt has spent.

 

Who cares? It's irrelevent to the point I'm trying to make.

Wrong. Excess Reserves are $9.

Deposits are not money. Deposits are claims on the bank's reserves.

They did no such thing. They created deposits that have a total claim of 100 Federal Reserve Notes.

Wrong. If depositors tried to spend more than what the bank had in its reserves, the bank would fail.

The Fed was not required to monetize US govt debt when it pumped trillions of dollars worth of reserves into the banking system a few years ago.

Deposits are not money. Deposits are claims on the bank's reserves.

 

Excess reserves are based on deposits. If the Fed gave the bank $10 where is the deposit? So you are wrong once again.

Banks say deposits are money. I'll believe the banks.

No they created $100 that can be used to transact in the real economy. There is $100 in money circulating the economy as in $100 buying actual goods and services. Who cares that it is only represented by $10 in reserves.

It would just borrow reserves from the bank that gets the increase of reserves. Once again you fail.

Deposits are money

 

You are incorrect here.

Money loaned to a person for a car was created in the same way The Fed creates money. Someone signed a piece of paper saying they will pay it back.

When a bank loans money it raises both its assets and liabilities by the loan amount. It is in this way that new money is created. They do not loan out their deposits, they simply credit both sides of the equation (Assets and liabilities) with the loan amount on top of the deposits that alread exist.

This entire process is laid out in detail in Modern Money Mechanics.

Banks create new money in essentially the same way The Fed does.

 

Very very good point. They are too fixated on physical Federal Reserve Notes. Their thought process is if every one decided to turn their deposits in to physical currency that there wouldn't be enough physical currency which means deposits are a "claim" on reserves and not actual money.

It is a ridiculous thought process but I have a feeling they will never change their mind on this no matter how it's laid out. Even if the banks tell them themselves that they are in fact creating money out of thin air by creating deposits.

They are basically saying money has to be converted in to something physical in order to be considered money even if 90% of transactions in America are done by just changing bytes in a computer, lol.

The reserve system is literally the way the Fed regulates the banks by manipulating the borrowing cost of money between the banks. If everyone decided to turn their deposits in to currency the Fed would just create more reserves, but the amount of money people had wouldn't change.

 

The reason there is a Fed Reserve, is: it is creationism at its finest. God created it. She did it to make the simple people more poor and weak so that only the wealthy and privialge will benifit.

It is gods will...

 

You haven't learned a thing, and still don't understand the concepts and differences between a bank loan multiplying deposits, and the Fed creating new money.

How much the Govt spends has nothing to do with the Fed's money supply. Your statement doesn't even make sense.

Feel free to show us a reliable source saying otherwise.

 

Not quite right.

As laid out in detail in Modern Money Mechanics, when a bank loans money, it is lending reserves (eg cash, base money) it has from deposits (it can lend up to 90% of the reserves it has from deposits and must maintain 10% of deposits in reserves). The lent reserves create a new deposits, however, no additional reserves are created.

When the Fed lends money or buys securties, new reserves are created.

Both actions create "money" if you use the broader base meaning of money which includes counting deposits, but fundamentally different things are happening.