Introduction In an earlier post (The Fed Does Not Create Money), I explained why the Federal Reserve banks do not create money. In this post, I will return to the definition of money and explain who creates money and the process by which claims used as money get produced. Definition of Money Money consists of … Continue reading Money Creation
Category: Money and Banking
Banking, the systems that holds money accounts, manages money transactions and facilitate the effective transfer of money between market actors. Banking also plays the primary role in the creation of artificial money.
Banks also buy notes from customers (still referred to as lending, but banks have nothing to lend.)
The Federal Reserve Does Not Create Money
Synopsis Over the years, many goods have been used as “money.” Because a good has been used as money in one situation does not make it money in all situations. The market determines by its use what good qualifies as “money.” The market in the United States generally uses something we call “dollars” as money. … Continue reading The Federal Reserve Does Not Create Money
Fed Funds Explained No. 6
“The Fed Buys U.S. Securities” A truth subject to misinterpretation. Introduction “The Federal Reserve purchases U.S. Treasury Securities to expand the money supply.” This statement contains some misinformation, and some truth and can be misleading. I will deal with these three points in order: Misinformation I have explained in an earlier post [“Who Actually Makes … Continue reading Fed Funds Explained No. 6
Fed Funds Explained No. 4
Does The Fed Provide Liquidity? You may have heard people say that The Federal Reserve provides “liquidity” to the banking system. Does it really? I will give you just a few facts about The Fed and its Open Market Operations in this article. In this limited space, I cannot answer this very complex question definitively, … Continue reading Fed Funds Explained No. 4
Fed Funds Explained No. 3
Banks Replace Gold and Introduce Fractional Reserves This post tells a short tale of how banks take ownership of gold (a money commodity) and replace it with notes and checking accounts used as money. Eventually, they create more checking account money than they have gold, creating “fractional reserve banking.” New Account In a time before … Continue reading Fed Funds Explained No. 3
Fed Funds Explained No. 2
Fed Funds Market Explained In my previous post, I explained the difference between dollars created by The Fed and dollars created by banks. Dollars created by The Fed do not act as money. In this post, I will briefly describe the Funds Market. I realize this is pretty boring stuff, but you need to understand … Continue reading Fed Funds Explained No. 2
Fed Funds Explained No. 1
Money Creation-Popular vs. Actual Models Introduction A lot of confusion exists around the Fed funds market in the Fed funds interest rate. Some of this confusion comes from misunderstanding the money creation and distribution processes. In this blog post, I will contrast the popular model of money creation with the actual money creation process. Popular … Continue reading Fed Funds Explained No. 1
Introduction to Fed Funds Explanation
I planned to write an explanation of Fed Funds for today's post. I intended to address some of the misstatements and errors that I hear and read about Fed Funds and the Fed Funds Rate. While researching, I discovered that the erroneous and confusing statements about Fed Funds are so numerous that I could not … Continue reading Introduction to Fed Funds Explanation
Who Actually Makes Money
Popular Assumptions Reserves held at the Federal Reserve somehow act as money — so goes popular assumption. When the Fed adds dollars to bank reserves, it simultaneously adds an equal number of dollars to the quantity of money. For a long time, empirical evidence seemed to confirm that theory. Around 1973 evidence began to appear … Continue reading Who Actually Makes Money
Who Changes Interest Rates?
Over and over, I hear that the Fed will "raise rates" to dampen inflation. Many reasons exist why rising rates would not, by necessity, affect inflation. In this post, however, I wish to explain why The Fed cannot unilaterally change interest rates. Diagram of Interest I will refer to the diagram below in the details … Continue reading Who Changes Interest Rates?