From: txl@teradata.com (Tuan Le)
Newsgroups: misc.invest
Subject: Re: Printing money
Date: 3 Sep 92 23:26:49 GMT
Reply-To: txl@tdat.teradata.com (Tuan Le)
Organization: Teradata Corp., El Segundo, CA

In article <Btyv2r.Hs9@apollo.hp.com> goykhman_a@apollo.hp.com (Alex Goykhman) writes:
>In article <977@tdat.teradata.COM> txl@tdat.teradata.com (Tuan Le) writes:
>>In article <1992Sep2.112523.8159@clpd.kodak.com> fischer@li.serum.kodak.com (Chris Fischer (x39613)) writes:
>>>In article <1992Sep1.232142.12511@gumby.dsd.trw.com> suhre@meltami.dsd.trw.com (Maurice E. Suhre) writes:
>>>>In article <1992Sep1.123344.25998@magnus.acs.ohio-state.edu> cthorne@magnus.acs.ohio-state.edu (Charles E Thorne) writes:
>>>>>The Federal Reserve buys back government debt (notes, bills, etc.).  
>>>>
>>>>This is a good chance to ask something I've wondered about.  Where does
>>>>the Fed get its money from?  Does it have an unlimited amount?
>>>>-- 
>>>>Maurice Suhre
>>>>suhre@trwrb.dsd.trw.com
>>>
>>>Yes.  It is called the Dept. of the Treasury.
>>Yes, but the FED got it out of thin air because THE FED is THE source.
>>-Tuan
>
>    None of the above.  Banks "print" money by extending loans,
>    they are THE SOURCE.  Every time a bank extends a loan, it has to 
>    deposit a certain percentage of the money being loaned (currently 
>    about %15) with the Fed (interest-free).
>
>    The Fed does not buy goverment debt BACK, it buys and sells
>    Treasury's on the open market to influence (short term) money supply,
>    i.e. buying Treasury's injects cash into the banking system,
>    selling them drains the cash out.
>
>    The Treasury Dept. collects taxes and sells Treasury's to
>    raise cash to finance goverment spending.
>
>    The goverment can lower short-term interest rates by exerting 
>    political pressure on the Fed, but can it re-inflate the economy?
>    Not with the $399B federal budget deficit/$4T debt.  Any attempts
>    by the Fed to drive real interest rates below zero (as Carter did
>    to help the poor) will cause the bond market to collapse making
>    it very difficult for the Treasury Dept. to finance the HUGE deficit
>    by selling bonds.  Another factor limiting the money supply is 
>    the current decline in collateral values, something that the
>    goverment can do little about.
>
>
>
>-- 
>-----------------------------------------------------------------------------------
>Disclaimer: all opinions are mine.
>-----------------------------------------------------------------------------------

This is an accurate portray of the process of creating money in the US, but
it does not address the basic question of where Money comes from.  In the
US monetary evolution, the Fed came long after the banks and that does make
it appear as Money started out with the banks.  Since the Fed's arrival and
the replacement of all bank notes with the Federal Reserve notes, Money should
be considered starting out at the Fed.  The Fed pumps more $ into the system
by either buying treasury notes (via its FOMC at the NewYork branch) or buy
lending to the bank thru its Discount Window.  The banks act like the "printer"
for the Fed; they create more money via the loan mechanism, but that is only
intermediary.  If the Fed doesn't add money, or $holders stash their money
under matresses, the banks can't create money.  That's why THE FED should be
considered THE SOURCE.  Another alternative source is the people as a whole
who accept with blind faith that their unused production can be preserved by
the $.  The Fed pushes, the $ users pulls.  The banks are just wheels and
levers between those pushing and pulling forces.
-Tuan
Newsgroups: misc.invest