The Federal Reserve is the central bank of the United States and is arguably the most influential economic institution in the world. One of the chief responsibilities set out in the Fed’s charter is the management of the total outstanding supply of U.S. dollars and dollar substitutes. The Fed is responsible for creating or destroying several billion dollars every single day.

MD: Should an institution be “influential”. Is that the reason for having institutions? How can the Fed manage the supply of U.S. dollars… and why the qualifier “outstanding”? If it’s money, it’s outstanding. Money that has served its purpose (i.e. monitoring a trading promise spanning time and space) is destroyed as it completes that function. If the Fed was really the RMP, it would be responsible for “monitoring transparently” the performance on money creating promises. How does the Fed “create” money? How does it “destroy” money? How can it possibly know the “outstanding supply” of money? It can’t… and it doesn’t. The Fed is a rigged game posing as regulation and control. It’s the money-changers “farming” operation… and Thomas Jefferson, himself being a planter, warned against exactly that.

Despite being colloquially charged with running the printing press for dollar bills, the modern Federal Reserve no longer simply runs new paper bills off of a machine. Some real dollar printing does still occur (with the help of the U.S. Department of the Treasury), but the vast majority of the American money supply is digitally debited and credited to major banks. The real money creation takes place after the banks loan out those new balances to the broader economy.

MD: The Fed never did run “bills off of a machine”. The Treasury has always done that at their “mints”. They have 4 (Philadelphia, San Francisco, West Point, and New Orleans). It has 2 printing presses: Ft. Worth and Washington, DC. This may be the only thing Washington DC actually produces… yet it makes up part of  3 of the wealthiest counties in the country… and part one of the poorest. Why so much wealth? Why so much poverty? 

At least the article gets one thing right. A RMP does addition and subtraction. But it doesn’t create money… and its member banks do not create money.  You can’t point to a single instance where money is created that there is not a trader “requesting (demanding)” that it be created. And it obviously isn’t loaned by banks because banks don’t have it to loan. They exist by creating 10x as much money as they have capitalizing the bank. And they collect a % which they call INTEREST. If it was their own money, that 2% to 4% would seem small. Groceries, the most efficient businesses out there, only earn 3% on their sales. But with banks 10x leverage, that becomes 20% to 40%. At 20%, money doubles every 3-1/2 years. At 40% it doubles in less than 2 years.

In a RMP, INTEREST just mitigates DEFAULTs experienced. No DEFAULTs… no INTEREST. The operative relation is INFLATION = DEFAULTS – INTEREST = zero.

Determining the Money Supply

The Federal Open Market Committee (FOMC) and associated economic advisers meet regularly to assess the U.S. money supply and general economic condition. If it is determined that new money needs to be created, then the Fed targets a certain level of money injection and institutes a corresponding policy.

MD: This doesn’t sound like a “real time” operation. And an RMP cares nothing about “economic condition”. An RMP knows exactly how much money is needed. It’s the amount of in-process trading promises created by traders. An RMP has no policy… unless that’s what you call mitigating DEFAULTs experienced with immediate INTEREST collections of like amount. I call that an automatic control system delivering an automatic negative feedback loop to the process.

It’s hard to track the actual amount of money in the economy because many things can be defined as money. Obviously paper bills and metal coins are money, and savings accounts and checking accounts represent direct and liquid money balances. Money market funds, short-term notes and other reserves are also often counted. Nevertheless, the Fed can only approximate the money supply.

MD: It’s not hard to track the actual amount of money. It’s the amount created by traders promises that have not yet been delivered as promised. It’s addition and subtraction and there is no hocus pocus involved. And not only can the RMP know precisely the supply and demand for money, it maintains that perfect perpetual balance in real time. That’s how it “guarantees” zero INFLATION… all the time… everywhere.

The Fed could initiate open market operations, where it buys and sells Treasurys to inject or absorb money. It can use repurchase agreements for temporary expansions. It can use the discount window for short-term loans to banks. By far, the most common result is an increase in bank reserves.

MD: The Fed has no income with which to buy anything. To the extent it is capitalized by its member banks, that’s a reserve to combat a “run on the banks”. That cannot happen with an RMP.  There are no reserves in an RMP. The RMP loans nothing. Thus, there is nothing “to run on”. To the extent that the process leaks (i.e. experiences DEFAULTs), it replaces those leaks immediately with INTEREST collections of like amount. It’s precise… and it’s real time.

We will now leave the remainder of the annotations as an exercise for the student. The principles are that simple. Have at it. And if you get stuck, revisit the real definition of money and the description of the Real Money Process (RMP).

Money Creation Mechanism

In the early days of central banking, money creation was a physical reality; new paper notes and new metallic coins would be crafted, imprinted with anti-fraud devices and subsequently released to the public (almost always through some favored government agency or politically connected business).

Central banks have since become much more technologically creative. The Fed figured out that money doesn’t have to be physically present to work in an exchange. Businesses and consumers could use checks, debit and credit cards, balance transfers and online transactions. Money creation doesn’t have to be physical, either; the central bank can simply imagine up new dollar balances and credit them to other accounts.

A modern Federal Reserve drafts new readily liquefiable accounts, such as U.S. Treasurys, and adds them to existing bank reserves. Normally, banks sell other monetary and financial assets to receive these funds.

This has the same effects as printing up new bills and transporting them to the bank vaults, only it’s cheaper. It is just as inflationary, and the newly credited money balances count just as much as physical bills in the economy.

The Credit Market Funnel

Suppose the U.S. Treasury prints up $10 billion in new bills, and the Federal Reserve credits an additional $90 billion in readily liquefiable accounts. At first, it might seem like the economy just received a monetary influx of $100 billion, but that is actually only a very small percentage of the actual money creation.

This is because of the role of banks and other lending institutions that receive new money. Nearly all of that extra $100 billion enters banking reserves. Banks don’t just sit on all of that money, even though the Fed now pays them 0.25% interest to just park the money with the Fed Bank. Most of it is loaned out to governments, businesses and private individuals.

The credit markets have become a funnel for money distribution. However, in a fractional reserve banking system, new loans actually create even more new money. With a legally required reserve ratio of 10%, the new $100 billion in bank reserves could potentially result in a nominal monetary increase of $1 trillion.