Many posts here say essentially: "The Fed is causing a massive increase in the money supply in order to head off Y2K panic, and this will surely fuel a terrible inflation." Wrong, on several counts.

First of all, realize that the Federal Reserve does not create money. Our banking system does that. It is a routine operation: banks create the money they lend out, in the form of checkable deposit balances. As those loans are repaid, money is destroyed. Most of the time, the creation process is only somewhat more rapid than the rate of destruction, so the money supply grows at a modest pace.

Now the Fed has recently been making a lot more reserves available to the banking system. But they are being held as "excess" by cautious banks and are not being used to expand loaning/money creation. Reserves are not money, even when banks hold them in the form of vault cash. So what economists call the "money multiplier" standing between reserves and the money supply is falling. And even if the newly-injected reserves were being used for money creation, the Fed can easily reverse course and drain reserves.

You may have heard that there has been a rapid increase in the M3 measure of money. But this broad "money" measure includes things like large certificates of deposit, Treasury bills, and other assets which are hardly spendable. A much better money measure, the narrower M2, has been growing at an annual rate of 6% or so.

Now two general lessons: first, money supply growth is inflationary only when it exceeds money DEMAND growth at zero inflation. And with our current economic boom, there is a natural increase in the demand to hold money, even if the price level remains constant.

Second: money demand can grow faster or slower for institutional or technological reasons. New financial institutions, new types of deposit, legislation and deregulation all affect it. In other words, the link between money supply growth and inflation is far more complicated than the simple proportional one that was once the gospel of economic popularizers (and perhaps still is).

"The LACK of money is the root of all evil." -- George Bernard Shaw

-- Unreel (cometo@tention.net), January 01, 2000

Answers

Yes, however when they call the reserves back the ratio is 10 to 1. Don't you understand fractional reserve banking?

-- Gen. Sherman (riverhouse@saber.net), January 01, 2000.

>> First of all, realize that the Federal Reserve does not create money. Our banking system does that. <<

What about when the FOMC buys Treasury bonds to add to reserves? My understanding is that this action adds some very high-powered money to the system, in that the FOMC does not purchase these bonds out of any revenue stream, but purely with "created" money.

-- Brian McLaughlin (brianm@ims.com), January 01, 2000.

Unreel knows about the "party-line" explanation of banking - but not how the Fed and Banks work. Brian is correct about the Fed injecting created paper into the economy.

Too many other references about this to explain it again. The Fed intervenes almost everyday, and the credit created the last few months has been astounding.

-- Gregg (g.abbott@starting-point.com), January 01, 2000.

General Sherman, I have been teaching Money and Banking at universities for 20 years. The "money collapse" multiplier you seem worried about is the same as the expansion multiplier based on reserves, and it is much less than 10 even for M2. Besides, total reserves in the banking system rarely shrink for very long; they grow, more rapidly or more slowly.

Brian, "high-powered money" is a rather unfortunate synonym for reserves. Whether they are in the form of deposits at the Fed or Federal Reserve notes in bank vaults, reserves are NOT money. Only when the vault cash is handed over to the non-bank public, at its discretion, do those paper slips enter the money supply. Any financial asset that may be accounted as money must be in the hands of a spender, not the banks or the Fed.

Gregg, do you really believe that "real" banking is being hidden beneath a "party line" explanation? You have been taking the monetary crank literature nonsense much too seriously. The Fed does not inject created paper money directly into our economy at any time or place. At most it makes more reserves available, but the final determinant of the money supply is banks willingness to lend and the public's willingness to borrow and its choice of which assets to hold. If you took your cash right now and added it to any of your bank deposits, YOU would set off a multiple amount of money creation. That's the way it is, and I'll let you in on a secret: it WORKS.

-- Unreel (cometo@tention.net), January 02, 2000.

Teacher.

Tell us all about Jekyll Island please.

Is the FED a private corporation?

Who are the members of the board?

Why have they been pumping out dollars (liquidity) up the kazoo just prior to y2k?

-- Andy (2000EOD@prodigy.net), January 02, 2000.

Andy, among the many meetings of bankers between 1908 and 1913 to discuss the formation of a permanent central bank was a private gathering on Jekyll Island in Georgia. Conspiracy-theory nutballs love to bring this up, but it means virtually nothing. Great name though!

The Federal Reserve, for all intents and purposes, is a government agency. Only in a fine legal sense is it a private corporation. It has few attributes of a regular corporation. Its "shares" are largely ceremonial; they do not confer voting rights, they are nontransferrable, and they return only a pittance of a dividend to the member bank holders. So no, the Fed is not owned by International Banksters or Zionist Masons in London, Zurich, or Mars. In fact, it is not really owned by anyone, no more than the Department of the Interior. A number of central banks around the world were set up as "quasi-government agencies." The Bank of England was for 250 years. The Bundesbank (Germany) still is. But all perform the same functions as any purely-governmental central bank.

-- Unreel (cometo@tention.net), January 02, 2000.

Journeyman (10/18/99; 15:46:02MDT - Msg ID:16813) WHO OWNS THE FEDERAL RESERVE; JCS @ Message ID #16809 You've probably been assuming your whole life, when you thought of it, that the "Federal Reserve" was a government agency of some sort. As hard as this may be for you to believe, despite the misdirective use of the word "Federal" in it's name, it is not. It is, in fact, an agglomeration of privately owned banks which work hand in glove with the Federal Government. -L.Reichard White, "MONEY," (Brownsville, Penna: WhiteINK 1997)

The bankers have also been able to deceive the American people into believing that a Federal Reserve Bank is a government institution, when in fact, each one is privately owned. If you want to see for yourself, look in the government pages of a phone book in a large city such as Los Angeles or San Francisco. [A city where there is a Federal Reserve branch bank. -LRW] You will not find any Federal Reserve Bank listed in the government pages. But you will find a Federal Reserve Bank listed in the white pages, just like any other privately owned corporate entity. The Ninth Circuit Court of Appeals also confirms the fact of private ownership.

Each Federal Reserve Bank is a separate corporation owned by commercial banks in its region. -Lewis v. United States, 680 F.2d 1239, 1241 (1982). -Otto Skinner, The Biggest 'Tax Loophole' of All, (San Pedro, CA: Otto U. Skinner 1997) p. 163.

Here is an idea of who owns the Federal Reserve from The Economic Rape of America by Fredrick Mann, p21:

WHO OWNS THE FEDERAL RESERVE?

There has been much speculation about who owns the Federal Reserve Corporation. It has been one of the best kept secrets of the century, because the Federal Reserve Act of 1913 provided that the names of the owner banks be kept secret. However, R. E. McMaster publisher of the newsletter The Reaper, asked his Swiss banking contacts which banks hold the controlling stock in the Federal Reserve Corporation. The answer:

1. Rothschild Banks of London and Berlin 2. Lazard Brothers Bank of Paris 3. Israel Moses Sieff Banks of Italy 4. Warburg Bank of Hamburg and Amsterdam 5. Lehman Brothers Bank of New York 6. Kuhn Loeb Bank of New York 7. Chase Manhattan Bank of New York 8. Goldman Sachs Bank of New York

In The Secrets Of The Federal Reserve, Eustace Mullins indicates that, because the Federal Reserve Bank of New York sets interest rates and controls the daily supply and price of currency throughout the U.S., the owners of that bank are the real directors of the entire system. Mullins states:

"The shareholders of these banks which own the stock of the Federal Reserve Bank of New York are the people who have controlled our political and economic destinies since 1914. They are the Rothschilds, Lazard Freres (Eugene Mayer), Israel Sieff, Kuhn Loeb Company, Warburg Company, Lehman Brothers, Goldman Sachs. the Rockefeller family, and the J.P. Morgan interests."

Regards, Journeyman

-- Bruce T. Dague (Who the fed @re.they?), January 02, 2000.

Come on, Bruce. You are coming up with the same old nonsense long purveyed by cranks, conspiracy wackos, extremist ghouls, and readers of the "Protocols of the Learned Elders of Zion." I have read Mullins's book and it ka-ka from start to finish. There is no secret to the membership of the Fed: all national banks are required to be members, and any state-chartered bank can opt for membership. Of course, since the Banking Act of 1980, membership is practically meaningless.

-- Unreel (cometo@tention.net), January 02, 2000.

Unreel: Easy question for you -- how do I get myself authorized to print up money and use it? I mean, if we can't play by simple rules, like gold as money, I'd like to at least be a power player. Thanks, dude.

-- King of Spain (madrid@aol.cum), January 02, 2000.

King, you forget that the banks who, in a sense, "print money," lend it all out. They don't get to keep it. It does not give them power, any more than one seller of hamburgers in a city full of hundreds of hamburger competitors has power. They produce it for lenders, not themselves. Economists deromanticize money. Its creation is a very mundane activity.

Gold is a very poor form of money. It is weighty, easily counterfeited, clipped, debased, and shaken. Do we really want gold-testing equipment at all retail outlets, or millions of broken teeth from biting suspect coins? Besides, gold is very useful stuff now, in the electronics industry alone. It would be a terrible waste to tie it up in use for currency when numbers in accounts do just as well and use no resources.

-- Unreel (cometo@tention.net), January 02, 2000.

Unreel,

People who believe the Fed is an agglomeration of private banks are conspiracy nuts??

Each Federal Reserve Bank is a separate corporation owned by commercial banks in its region. -Lewis v. United States, 680 F.2d 1239, 1241 (1982). -Otto Skinner, The Biggest 'Tax Loophole' of All, (San Pedro, CA: Otto U. Skinner 1997) p. 163.

That makes the court that ruled in Lewis v. United States conspiracy nuts.

Besides, if conspiracies don't exist, why do Federal Prosecutions regularly charge people with "conapiracy?"

Or is there another name for it when it's done by the rich and politically influential?

And, O.K. I'll give you that when the Fed "prints" money, they loan all of it out.

I'll guarantee to loan all the money out I print too. Is that O.K.?

I'll have to wait till the first monthly repayments on those loans come in, but hey, I'm patient.

Health, happiness & long life, L. Reichard White

-- L. Reichard White (lreichardwhite@yahoo.com), August 02, 2002.