It
must be realized that while money may represent an asset when
considered as an aggregate of the total money supply, it is not that
at all. A man who borrows $1,000 may think he has increased his
financial position by that amount, but he has not. That $1,000 asset
is offset by a loan liability of the same amount; thus his “net”
cash position is zero. So, if you were to add up all the bank
deposits in the nation the ‘net’ balance would be zero because
every bit of this money is owed by somebody. Someone has to borrow
every dollar that is in circulation, whether it is cash or credit;
otherwise we all starve. Also, no matter where you work or earn
money, it’s “origin” was a bank and its ultimate “destination”
is to be deposited into a bank. Now, let’s see how money is
created. The Federal Reserve purchases government bonds from the U.S.
Treasury (not bought by the public) by
writing a check
to Congress in exchange for them (there is no money deposited
anywhere to back up this check). By calling these bonds “Reserve
Notes” the Federal Reserve uses them as a base for “creating”
nine additional dollars for every dollar created on top of the bonds
themselves. Some of the money is spent by the government while the
rest is used as the source for bank loans made to businesses and
individuals. Incidentally, the Federal Reserve charges and collects
‘interest’ payments on money it creates out of nothing. The
benefit to Congress is that it now has access to unlimited funding
without having to tell the public that they are paying a “tax” on
this ‘fiat’ currency through the loss of purchasing power called
“inflation.”
The
U.S. Treasury printing press adds ink to pieces of paper (commercial
paper??) and creates impressive designs around the edges, and calls
this creation a Treasury Note/Bond. This is merely a government IOU
or promise to pay a specified sum and accrued interest at some
definite time in the future. In reality, the government has created
cash (technically), but it doesn’t look like or have the function
of currency/cash as of yet. This Bond/Note is purchased by the
Federal Reserve where it is now considered an “asset” because it
is backed by the government (“full faith and credit”) as good to
pay the money back because of its taxing authority. The Federal
Reserve can use this asset to offset any “liability” that it
incurs in making loans to the banks. Now the Federal Reserve
“creates” this liability by adding ink to yet another piece of
paper and exchanging it with the government (U.S. Treasury). This
second piece of paper becomes a Federal Reserve Check (although there
is no money in any account to cover this check). This Check is
received back at the U.S. Treasury department where it is endorsed
(“legal tender”) and sent back to one of the Federal Reserve
branch banks and deposited into the government’s account; where it
pays government expenses. After that, it is transformed into many
checks, becoming the ‘first wave’ of fiat
money
flooding into the economy (“money supply”).
Recipients
of these checks deposit them into their own bank accounts where they
become commercial bank deposits. Federal Reserve guidelines stipulate
that these deposits are classified as “fractional reserves”
because banks are permitted to hold as little as 10% in ‘reserve,’
while the remainder are called “excess reserves.” This makes
these monies available to be converted into bank loans. Since it
would be illegal to have a double-claim on the
same money
(customers’ deposits and borrower’s loans) the Federal Reserve
merely creates money out of thin air for the purpose of backing the
‘excess reserve’ loan amounts. When this “second wave” of
fiat money moves into the general economy, it comes right back into
the banking system. What was a” loan” on Friday comes back as a
“deposit” on Monday. This deposit is again reclassified as a
“reserve” and ninety percent becomes “excess” and the process
keeps repeating itself all over again. Now are you getting the
picture? It takes about twenty-eight times of passing through the
revolving door of deposits becoming loans before it finally maxes
out. The amount of fiat money created by the Federal Reserve is
approximately nine times the amount of the “original” government
debt which made the entire process possible.
When
banks run short on money the Federal Reserve stands ready as “the
lender of last resort” to make loans available to them. Banks
usually hold “reserves” of about 1-2% of deposits in vault cash
and 8-9% in securities; so their operating margin is extremely thin.
It is not uncommon for a bank to experience a temporary negative
balance, caused by unusually high customer/depositor cash demand, or
on large clusters of checks clearing through other banks at the same
time. When a bank borrows a dollar from the Federal Reserve it
becomes a one-dollar reserve. Since banks are required to keep
reserves of only about ten percent, it means they can actually lend
up to nine dollars for each dollar they borrow from the Federal
Reserve. This is certainly a profit incentive for the bank, and it
goes something like this: Some bank borrows one million dollars from
the Federal Reserve and is charged an annual interest rate of 8%, so
the total amount it has to pay on this loan is $80,000 ($1,000,000 x
0.08 = $80,000). The bank treats this loan as a cash deposit where it
will be used as a basis for manufacturing an additional nine million
dollars to be loaned out to borrowers. Let’s say the bank charges
11% annual interest on $9,000,000 in loans; that would amount to a
whopping $990,000 ($9,000,000 x 0.11 = $990,000). But don’t forget
that the additional income generated from this loan amount now
becomes part of the overall money supply of the nation.
Here
is a sober lesson for those advocates who want to pay off the
national debt. Since our money supply, at the present time at least,
is tied to the national debt, paying off the debt would cause money
to disappear; consequently we would starve to death because how would
we pay for anything? Even to seriously reduce it would cripple the
economy. The Federal Reserve holds about 7% of the national debt, and
since the money supply is pyramided roughly ten times (on top of
government bonds), each dollar eliminated from the national debt
would cause the money supply to contract dramatically ($1.00 x .07
x10 = $0.70). That’s right; for each debt that would be paid down
or eliminated also means that the dollar would also shrink down to
where everything balances to zero. So, debt is necessary- it’s just
the management of that debt which poses the greatest problem.
NOTE: This information resourced from online and printed materials.
NOTE: This information resourced from online and printed materials.
Robert
Randle
776
Commerce St Apt 701
Tacoma,
WA 98402
November 2, 2017
