Money Creation. Might as well jump in here with my two cents.
(1) It is only the Federal Reserve Bank that creates money.
The way that this is done is not intuitively obvious. to explain the process I will quote liberally from the American "Austrian" economist's booklet - "What Has Government Done to Our Money?"
"The Central Bank adds to the quantity of bank reserves by buying assets on the market. What happens, for example, if the Bank buys an asset (any asset) from Mr. Jones, valued at $1,000? The Central Bank writes out a check to Mr. Jones for $1,000 to pay for the asset. The Central Bank does not keep individual accounts, so Mr. Jones takes the check and deposits it in his bank. Jones' bank credits him with $1,000 deposit, and presents the check to the Central Bank, which has to credit the bank with an added $1,000 in reserves. This $1,000 in reserves permits a multiple bank credit expansion, particularly if added reserves are in this way pours into many banks across the country.
"If the Central Bank buys an asset from a bank directly, then the result is even clearer: the bank adds to its reserves, and a base for multiple credit expansion is established.
"Undoubtedly the favorite asset for Central Bank purchase has been government securities. In that way the government insures a market for its own securities. Government can easily inflate the money supply by issuing new bonds and then order its Central Bank to purchase them."
The difference between Fed action and any other source is that it creates the deposit without simultaneously debiting a like account elsewhere, which is the case with all other examples cited. Ginnie Mae or Freddie Mac package and sell $100 million bonds. The selling institution obtains a $100 million deposit but the the bank of the purchaser loses a $100 million deposit. The effect on the reserve system is zero sum.
Hope that helps. |
