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To: Lee Lichterman III who wrote (60180)	1/21/2001 1:02:21 PM
From: flatsville	Read Replies (1) \| Respond to of 436258

L3- This is a pretty good tutorial. (But very long.) 203.79.82.35 A few exceprts: Who Creates Money? Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public. The major control, however, rests with the central bank. The actual process of money creation takes place primarily in banks.(1) As noted earlier, checkable liabilities of banks are money. These liabilities are customers' accounts. They increase when customers deposit currency and checks and when the proceeds of loans made by the banks are credited to borrowers' accounts. In the absence of legal reserve requirements, banks can build up deposits by increasing loans and investments so long as they keep enough currency on hand to redeem whatever amounts the holders of deposits want to convert into currency. This unique attribute of the banking business was discovered many centuries ago. It started with goldsmiths. As early bankers, they initially provided safekeeping services, making a profit from vault storage fees for gold and coins deposited with them. People would redeem their "deposit receipts" whenever they needed gold or coins to purchase something, and physically take the gold or coins to the seller who, in turn, would deposit them for safekeeping, often with the same banker. Everyone soon found that it was a lot easier simply to use the deposit receipts directly as a means of payment. These receipts, which became known as notes, were acceptable as money since whoever held them could go to the banker and exchange them for metallic money. Then, bankers discovered that they could make loans merely by giving their promises to pay, or bank notes, to borrowers. In this way, banks began to create money. More notes could be issued than the gold and coin on hand because only a portion of the notes outstanding would be presented for payment at any one time. Enough metallic money had to be kept on hand, of course, to redeem whatever volume of notes was presented for payment. Transaction deposits are the modern counterpart of bank notes. It was a small step from printing notes to making book entries crediting deposits of borrowers, which the borrowers in turn could "spend" by writing checks, thereby "printing" their own money. ***** Bank Deposits - How They Expand or Contract Let us assume that expansion in the money stock is desired by the Federal Reserve to achieve its policy objectives. One way the central bank can initiate such an expansion is through purchases of securities in the open market. Payment for the securities adds to bank reserves. Such purchases (and sales) are called "open market operations." How do open market purchases add to bank reserves and deposits? Suppose the Federal Reserve System, through its trading desk at the Federal Reserve Bank of New York, buys $10,000 of Treasury bills from a dealer in U. S. government securities.(3) In today's world of computerized financial transactions, the Federal Reserve Bank pays for the securities with an "telectronic" check drawn on itself.(4) Via its "Fedwire" transfer network, the Federal Reserve notifies the dealer's designated bank (Bank A) that payment for the securities should be credited to (deposited in) the dealer's account at Bank A. At the same time, Bank A's reserve account at the Federal Reserve is credited for the amount of the securities purchase. The Federal Reserve System has added $10,000 of securities to its assets, which it has paid for, in effect, by creating a liability on itself in the form of bank reserve balances. These reserves on Bank A's books are matched by $10,000 of the dealer's deposits that did not exist before. See illustration 1....

To: Lee Lichterman III who wrote (60180)	1/22/2001 7:23:06 AM
From: KyrosL	Respond to of 436258

AG (or rather the Federal Reserve Bank or Fed) controls interest rates and M1 money directly. The Treasury has nothing to do with money creation. The Fed only controls short term interest rates by setting the Fed funds and discount rates and then creating (or withdrawing) enough money to make these rates stick. Long term interest rates are controlled by the market. If the market thinks that the Fed creates too much money and thus there is a threat of inflation, long term interest rates go up. Also, other monetary aggregates such as M2 and M3 are largely controlled by the market, although they are influenced by Fed policy. In the past the Fed used to target monetary aggregates and tried to adjust short term interest rates to keep these aggregates within certain limits. Under AG the Fed abandoned these goals, because monetary aggregates are too chaotic and, as AG admitted, he doesn't really know what money is. Instead, the Fed now just sets short term interest rates and creates or withdraws enough money from the market (by purchasing or selling T-bills) to make these rates stick. Many people confuse the Treasury buybacks of debt as money creation. This is not so. The money the Treasury uses to buy back debt already exists: it is our tax dollars. Kyros