How Banks Create Money
How Banks Create Money:
Objectives

Purpose

Why does it make any difference whether The Federal Reserve or a cartel of banks, under the influence of The Federal Reserve, creates money? Monetary expansion, as explained in the Austrian business cycle theory, still remains the root cause of business booms and busts.

Clearly understanding what entities create money and how they create money matters for at least two distinct reasons:

  1. To determine the timing and magnitude of monetary expansion.
  2. To understand the systemic nature of monetary expansion in order to design a solution to this major economic problem.
    • Closing The Federal Reserve will not, by itself, solve the money inflation problem.

In order to help you understand what entities create money and how they create it, this presentation has one clear purpose: to describe accurately the mechanics of artificial money creation in the US banking system.

Objectives

I will show how:

  1. A fractional reserve banking system allows banks to increase the quantity of money, independent of any central bank (e.g. The Federal Reserve).
  2. The Federal Reserve does not control the quantity of money, it simply influences it.
  3. Bank reserves (created by The Federal Reserve) never enter the general economy, thus do not qualify as money.

 


Suggestion: Since I designed this as a "presentation," it will have more continuity for you if you click through the presentation pages in sequence, using the "forward" links at the bottom of each page, before you come back to use the drop down menu above.

Let's move on to the Introduction.