By Muriel Mobley

WARNING: What you learn here may disturb your beliefs.

Money influences every human in developed countries
from birth to death. It is the one subject that transcends age, race,
sex, religion, politics, or any other devisive human influence. Yet,
far too few people understand the origin of money or the influence
money has over their lives. How much time is devoted to getting money?
How many family “values” are subverted such as abandonment of children
to day care so parents can spend their time getting money?

There is an enormous amount of literature devoted to
getting money. The getting of money is usually expressed as “making
money.” As we shall see, “making money” is a semantic and literal
fallacy.

Various information media through financial journalism and advertising offer advice about how to “make money.”

Where does the money that is the subject of so much
advice on how to “make” come from? How is it actually made so that it
is available to “make”? From here on the word create will be used to
distinguish the actual making, that is the creation of money, from the
semantic fallacy, “making money.”

What are the effects of how money is created?

Where can one find out?

Information presented here will help answer the above questions.

MONEY CREATION BY DEPOSIT EXPANSION

Money is created by the loan making activity of
banks. Original bank reserves are created and uncreated by actions of
the Federal Reserve by buying and selling, primarily, U. S. Treasury
Securities in the open market. The Federal Reserve does not use its own
money or anyone else’s money to purchase securities. The Fed creates a
deposit by check or computer entry that is credited in a commercial
bank deposit account. At the same time, the Fed credits the commercial
bank’s reserve account with the same amount. In short, it creates the
money out of its legally endowed power of doing so.

Commercial banks use the reserve deposit as the basis
on which they make loans. The commercial banks expand reserve deposit
money by a procedure known as fractional reserve deposit expansion. By
this procedure, commercial banks may expand original reserves by ten
times or more. The following is an excerpt from FEDPOINT45:

Reserve Requirements and Money Creation
Reserve
requirements affect the potential of the banking system to create
transaction deposits. If the reserve requirement is 10%, for example, a
bank that receives a $100 deposit may lend out $90 of that deposit. If
the borrower then deposits the $90, the bank receiving that deposit can
lend out $81. As the process continues, the banking system can expand
the initial deposit of $100 into a maximum of $1,000 of money
($100+$90+81+$72.90+…=$1,000). In contrast, with a 20% reserve
requirement, the banking system would be able to expand the initial
$100 deposit into a maximum of $500 ($100+$80+$64+$51.20+…=$500).
Thus, higher reserve requirements should result in reduced money
creation and, in turn, reduced economic activity.

MONEY CONTRACTION BY DEPOSIT CONTRACTION

The Fed uncreates money by selling securities and
canceling previously created deposits. Commercial banks must follow and
contract their deposit expansion.

The total of money in circulation is the sum of this complex activity.

A detailed explanation of deposit creation and expansion can be found in a thirty-eight page booklet, Modern Money Mechanics,
obtainable from the Federal Reserve Bank of Chicago. The booklet is
free and can be ordered from FRB of Chicago Public Information Center,
P. O. Box 834, Chicago, Il 60690-0834.

Money is put in circulation when banks make loans, and money is taken out of circulation when loans are repaid.

Some money is coined by the U. S. Treasury and
deposited for credit in Federal Reserve banks. Federal Reserve banks
issue Federal Reserve Notes (paper money) to commercial banks for the
convenience of bank customers who prefer paper notes to paper checks.
Coins and notes account for a minor part of economic exchange.