How Banks Create Money
Transaction Between The Fed & Non-Banks

So far, we have seen that when The Fed buys and sells securities with banks (or conversely, when The Banks sell and buy securities with The Fed) that nothing happens to the money supply. These transactions simply increase or decrease, respectively, the quantity of bank reserves. The Banks must either sell or buy assets with their customers to have any direct influence on the supply of money. But what happens when The Fed buys or sells securities with non-bank entities?

These transactions have a somewhat different effect on the supply of money. They do not, however, change the conclusion that The Banks—not The Fed—create money. In this case The Fed must rely on The Banks to create the money needed to complete their transaction with non-bank entities.

I will show just one transaction in The Fantasy Banking System in which The Fed buys securities from a non-bank entity.…

When The Fed sells securities it simply has the inverse effect as when it buys them.