The Federal Reserve on… The Federal Reserve

September 15, 2009 at 13:36 | Posted in Economic Theory, economics, Federal Reserve | Leave a comment

 

http://www.federalreserveeducation.org/fed101/fedtoday/FedTodayAll.pdf (check for yourself if you don’t believe it)

 

Page 29:

Myth:

When the Fed prints money for banks it increases the national debt.

[Nice Strawman, should have stuck to that…]

REALITY:

Federal Reserve Banks do not print money, they manage the inventory of the existing stock of
currency. Money is printed by the Bureau of Printing and Engraving, an agency of the U.S.
Treasury Department. Government debt is generated by government borrowing.The amount
of bor rowing, measured by the deficit, is not decided by the Fed.The government’s debt and
deficit are the result of the budgetary decisions of the Congress and President.

 

Ok, then…

Myth:

The Fed is not a good supervisor of banks because it allows banks to keep only a fraction of
their deposits on hand.

REALITY:

The fact that banks are required to keep on hand only a fraction of the funds deposited with
them is a function of the banking business. Banks bor row funds from their depositors (those
with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds).
Banks make money by charging borrowers more for a loan (a higher percentage interest rate)
than is paid to depositors for use of their money. If banks did not lend out their available funds
after meeting their reserve requirements, depositors might have to pay banks to provide
safekeeping services for their money.
For the economy and banking system as a whole, the practice of keeping only a fraction of
deposits on hand has an important cumulative effect. Referred to as the fractional reserve
system, it permits the banking system to “create”money.

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