Hi THC,
Who gets to keep the profits made when a piece of paper only worth a few cents (a US $100 bill) is introduced to a market where it can buy $100 worth of goods?
I believe the piece of paper is printed by the US Treasury on behalf of the Federal Reserve System. However, at this point, the piece of paper is not yet money.
The Federal Reserve System purchases the piece of paper from the US Treasury at the cost of the printing. However, at this point, the piece of paper is not yet money. I'm not sure why the Fed just doesn't do the printing itself. Maybe they want to keep up "appearances".
Anyway, eventually, some commercial bank somewhere orders these pieces of paper from the Federal Reserve System to distribute to its "customers" because the "customers" want some old-fashioned walking-around "money". The commercial bank trades some of its reserves for the piece of paper at face value, or it borrows reserves from the Federal Reserve System in an amount equal to the face value of the piece of paper. However, at this point, the piece of paper is not yet really money, as much as it is a reserve "asset" for the commercial bank.
Finally, someone walks into the bank or up to an ATM and exchanges his previously deposited or previously borrowed "debt credits" held within the commercial bank for the piece of paper. The piece of paper now finally becomes "money", and the bank loses reserve "assets" in proportion to the amount of the face value of the piece of paper the "customer" withdrew.
Who profits? On the face value of the piece of paper -- no one profits. The face value of a Federal Reserve Note is merely a three-dimensional (well mostly two-dimensional) manifestation of "principal" and no one ever profits from the principal itself (well, except maybe the US Government, because they'll never repay any of their loans, as their borrowings form the basis of the entire system). Loan principal is simply a platform on which to construct loans, and it is the interest on the loan principal that someone "gets". The commercial banks "earn" interest mainly from private lending and the Federal Reserve System "earns" interest mainly from public and commercial bank lending. (You may earn some interest too, just don't pyramid your principal to the absurd heights the banks normally do, or you'll get arrested).
If this explanation seems odd, then imagine what happens when a loan is paid down. When a loan is repaid, the whole process reverses and the principal is ultimately extinguished, and no one "loses" it -- no gain, no pain. |
