How is Money Created?
This is of interest, and important distinction, too, imho: The primary difference between the United States Note and the Federal Reserve Note is that a United States Note is created by the government directly as a bill of credit, and thus there is no interest for the Government to pay for the creation of that dollar. A Federal Reserve Note, on the other hand, is bank currency, and the U.S. has to pay interest on the treasury bonds that it gives the Federal Reserve System in exchange for the right to produce a like quantity of Federal Reserve Notes. This, in turn, increases the tax burden on the people. Abraham Lincoln advocated the use of United States Notes because they avoid the usury and debt multiplication aspects of debt-based currencies, and thus save the Government immense sums of interest. Thomas Jefferson also believed that the issuing power of money should rest with the US Treasury, and not the private banks. http://en.wikipedia.
41. What is the fractional reserve method of banking? The fractional reserve method of banking originated with the goldsmiths the predecessors of our present bankers. It is the method of banking in use today. Briefly, it is a system whereby bankers maintain as reserves only a fraction of the amount needed to meet all the claims against them. (The vast bulk of the claims against the banks are the deposits you and I hold. These are obligations which the bank must pay upon our demand.) The goldsmiths struck upon this method by noticing that the people who deposited gold with them for safekeeping only claimed a small portion of this gold at any one time. Therefore the goldsmiths realized that they could lend out a good portion of the gold left with them. They then made loans, which in fact were not of gold but warehouse receipts for gold. These receipts circulated as money. Notice, the gold actually the certificates of ownership being loaned by the goldsmith was not his to lend. He did not
The Federal Reserve Bank of Chicago used to publish a pamphlet entitled Modern Money Mechanics , which explains M1, M2, and M3. It is a truly fascinating read. That pamphlet is no longer in print, and the Chicago Fed has no plans to re-issue it. However, electronic copies are available (see link ). In it, the process by which the Fed creates money “out of thin air” is detailed.
