Creating Money

Just a quick question concerning the monetary system. As I see it there are basically two ways new money can come into existence. The first would be when banks hand out money they don't really have thanks to the magic of fractional reserve banking. The second way new money is created would be when the Federal Reserve issues new money through the US Mint or what ever.

Basically I'm just wondering how these two things connect together. Do banks actually get new money from the Federal Reserve when they issue a loan, or do they merely change some numbers on a computer? Not that it really matters because the Federal Reserve would simply print some pretty paper notes or change a few numbers on a computer to indicate that bank now has more money reserves.

So in both cases they are still creating money from nothing, but I just want to know if it's part of one process where the Federal Reserve issues new money when the banks need to issue loans on reserves they don't have, or if the banks can also create new money independently of the Fed just by changing some numbers in their system. Because it seems like an important distinction to make in my opinion.

reply to post by ChaoticOrder


"New money can come into existence" is tricky I think. In accordance with legal-tender laws I agree, notwithstanding counterfeiting methods that can introduce legal-tender currency into an economy. If people were free to exchange according to their preference, less concern about penalties imposed by legal-tender laws, then money different from that defined by legal-tender laws may come into existence.

In terms of physical currency banks can order physical currency from their FED branch. And as you point out the FED receives its stock of physical currency from the U.S. Treasury Department. I have no idea why one agency controls the money supply and another creates the physical currency. Seems … peculiar to me.

Here’s a site about discount window operations you may find useful: www.frbdiscountwindow.org...

The question you get at concerning whether banks create money independent of the FED is … you know I think the answer is dependent on your perspectives. Per the money-multiplier effect it is true that a bank creates money … in a sense. There is more money sent out into an economy, trouble is this money sent out into the economy is not an outcome of savings, where for instance if I loaned out $10.00 then I must abstain from purchasing something, but in fact I do not abstain from purchasing $10.00 of something.

Hopefully others will weigh in on the questions you’ve asked, if only because it’s difficult to get straight answers to such questions.

reply to post by Kovenov

The question you get at concerning whether banks create money independent of the FED is … you know I think the answer is dependent on your perspectives. Per the money-multiplier effect it is true that a bank creates money … in a sense.

But it's not just "in a sense", if you get a loan all they do is change some numbers on your account, and poof you can now can buy things with that money, even though the bank never really had reserves for that loan. If one can go out and spend money which never really existed, then it is real money in every sense of the word.

But I think I get how it works now. Banks must also loan money from the FED, I don't think they get it for free. But the trick is, anything they get from the FED, can be multiplied over and over again via fractional reserve banking, and that seems to be the way they can easily pay back those loans to the FED.

In fact, when the banks were in trouble during the last financial crash, the FED reportedly loaned out something like 16 trillion dollars to a range of different banks and other financial entities. Those loans were made with near zero interest rates, basically making it free money. Now imagine how much 16 trillion could be multiplied.

Star for your post though, it was helpful.

reply to post by ChaoticOrder


The fed doesn't actually print the money. How they create money is through quantitative easing by issueing and buying bonds. Keep in mind that the fed is also privately owned so they aren't allowed to physically print the money. The U.S. mint is run through the treasury department and they print the money. Fun fact there isn't enough paper currency to represent the total dollar amount of all the U.S. currency in the world or even the U.S.

reply to post by Krazysh0t

The U.S. mint is run through the treasury department and they print the money.

Yes but the Federal Reserve tells them when to print money and how much to print.

reply to post by ChaoticOrder

I'm just wondering how these two things connect together. Do banks actually get new money from the Federal Reserve when they issue a loan, or do they merely change some numbers on a computer?

it goes much deeper than that. and i may only know 1/2 the ways banks get their money[in this instance from home loans]...

1... new homowner needs loan, bank creates line of credit for the amount, never using their own $

2 ... bank gets loan amount 'underwritten' ... that will get them that full amount [cash?]

3... mortgauge is then sold several times over as 'securities' ... more money comes in

4...homowner makes payments ... more money for bank

5... loan is paid in full, bank waves by-by to homowner ... all the money [principal and intrest] has been theirs to use but is supposed to be kept in an account to pay back underwriter.

6.. bank waits like 30 days ... then files an 'unclaimed funds' against that account and will get to keep it because of somelaw that clinton passed. [unless the homowner gets smart and comes back to get his money!!!!]


this pdf. explains it [skip the first half of it ]projectavalon.net...

Let's ignore physical currency. Most money is never that anyway; most money will only exist on ledgers.

Banks get money from other banks. Right now we live in a ZIRP (Zero Interest Rate Policy) area (Japan has been living in one for over 20 years!) where banks will lend money to one another at a target rate from 0% to .25% (that is not a typo, really is .25%).

The Federal Reserve system acts as a broker between the banks. They do not issue money at will. What the Fed does do is purchase bonds (depending on the duration until the instrument matures changes its name) from the US Government, and then issues the money that is about the amount of bonds they purchased. Quantitative easing does the same thing, but in this case buys up private financial instruments and issues money based upon that.

When you get a loan from the bank: the bank can issue money based upon fractional reserves of their deposits. They can issue, for instance, 9 dollars for every one dollar they have for a car loan and 40 dollars for every deposit dollar for a mortgage.

In the investment world we call this leveraging, but we're talking banking, so we'll just stick to that road. Since deposits fluctuate and banks need to keep a certain amount of deposits on hand they will then get the money from another bank as a "loan" from them.

reply to post by GreenGlassDoor

What the Fed does do is purchase bonds (depending on the duration until the instrument matures changes its name) from the US Government, and then issues the money that is about the amount of bonds they purchased.

The Fed doesn't "purchase" bonds. To purchase something would imply you are giving something of value in return. The Fed takes the bonds and then in return gives the Government some money created from thin air.

reply to post by ChaoticOrder


False. The Federal Reserve system is not a singular "thing"; it is a collection of banks with a central hub. The bank members buy the bonds from the government then transfer them to the hub where upon it issues the cash. The Fed itself acts as the carburetor for how much of those bonds will be converted into cash.

They (the bank) buy the bonds with the money the bank possesses. The initial money the bank gets is from fees, loan repayments, our deposits, etc.

So no, it's not just money out of thin air.

I would tend to agree. Banks cannot create money out of thin air. Otherwise, how do you explain the massive number of bank failures in recent years? If a bank could magically create money out of thin air, then it would never go out of business.

Banks are businesses. And you need to make a distinction from a retail bank in your local town, and the Federal Reserve. The two are not the same.

The Fed is a central bank. It's basically operates like a retail bank, except on a much larger scale, in the sense that it lends money like a normal bank would. It's the "banker's bank", so to speak -- meaning banks can and do borrower from the Fed.

reply to post by CookieMonster09


Just watch the following video friend. Banks can and do create money from nothing. They collapse when bank runs happen or large amount of debtors default on their loans, that affects the banks in a drastic way because they rely on the debtor to pay off those debts which they have created with no real financial backing. Creating money from thin air comes at a high risk, if they cant turn that imaginary debt into real money they have to take a loss which they themselves have manufactured from thin air.

reply to post by GreenGlassDoor

False. The Federal Reserve system is not a singular "thing"; it is a collection of banks with a central hub. The bank members buy the bonds from the government then transfer them to the hub where upon it issues the cash. The Fed itself acts as the carburetor for how much of those bonds will be converted into cash.

Think about what you just said. If the member banks actually "buy" the Government bonds, then the rest of the process would be redundant, because they'd have some money in return for the bonds. But that's not how it happens. The only reason they swap bonds for new money is so that they can engage in "debt monetization". The Government trades bonds (Gov debt) for NEW currency, which the Fed supplies. That is exactly why Federal Reserve currency is BACKED BY DEBT. The more debt they monetize the more inflation that occurs. That's one way the Government can decrease the national debt, by transforming that debt into new money... which of course debases the money supply, and that's where the debt actually goes when it is monetized, into stealing value from our dollar.

reply to post by ChaoticOrder


Local banks can create the money themselves through loans.

The Fed guaranties that in the normal course of business its member banks can cover their deposits.

The Fed used to buy only U.S. Government Bonds, and loan money to local banks that were a little over extended any given day.

I think now, at least since 2009, the Fed can buy what ever it wants to, where ever in the world it wants to.

This video is pre 2000 but G. Edward Griffin explains it very well

Just watch the following video friend. Banks can and do create money from nothing. They collapse when bank runs happen or large amount of debtors default on their loans, that affects the banks in a drastic way because they rely on the debtor to pay off those debts which they have created with no real financial backing.

Doublespeak. You cannot have it both ways. Either banks can or cannot create money out of thin air. If they can create money out of thin air -- as you suggest -- there would be no such thing as a bank failure.

The fact is that banks fail. They cannot magically create money out of thin air. If the could, they would never be taken over by the FDIC. We have had record numbers of bank failures in this country, and yet you and your conspiracy nuts continue to espouse this ludicrous idea that banks can magically create money out of thin air. It's simply untrue.

Banks are businesses, and lend money from their own capital. Banks also have the ability to borrow from the Fed, if needed.

This is no different from any other business that lends money. Manufacturers lend money to their distributors. Car companies lend money to their dealerships. This is basic accounting, folks. Basic business. Manufacturers and car companies don't magically create money out of thin air, and neither do banks.

GE Capital lends money to businesses. They are one of the largest equipment lessors in the country, financing real estate, equipment, airplanes, etc. Are you suggesting that GE Capital, which is not a bank, magically conjures money out of thin air, too? If so, then practically any individual or business that lends money falls into your category of conjuring money out of thin air. It is standard business practice for businesses to lend money to other businesses.

Banks - especially the mega-banks - have trillions of dollars in assets. They have assets such as cash, loans receivables, real estate - bank branches, loan operations centers, etc., equipment - computers, ATM machines, etc., and investments in the stock and bond markets.

The big banks, like Chase, etc., literally have trillions of dollars in assets.

Somehow, people seem to neglect basic accounting. Banks have assets. Just look at the basic financial statement of any publicly-traded bank and you will see the amount of assets that they carry.

Many have probably made the same point, why not print more money to pay off the debt?

I mean, if they think newly printed money is good enough for circulation, then it should also be good enough for everything else, like paying off the debt.

The money the banks are creating doesn't really exist. This money doesn't really have the backing of our government past the set limits on the insurance program. The Stock Market also creates fake money that doesn't really exist. Boy, we are a gullible society

The money the banks are creating doesn't really exist. This money doesn't really have the backing of our government past the set limits on the insurance program. The Stock Market also creates fake money that doesn't really exist. Boy, we are a gullible society

Let''s say I design and manufacture a car, and it costs me $10,000 to do so, all expenses included. I then market this car, and sell it you for $15,000. Did I just create $5,000 out of thin air, or did I just earn $5,000 in profit?

If a bank lends $10,000 to a borrower, and over the course of the year, gets repaid $15,000, did the bank just magically create $5,000 out of thin air, or did it just earn a $5,000 profit?

The conspiracy nutcases that believe in the "money out of thin air" conspiracy would have to lump any company that earns a profit into the category of conjuring money out of thin air.

Interest earned is profit for the bank. It is no different than GMAC lending you money to purchase a car, or GE Capital lending you money to buy a refrigerator. Profits derived from interest income are not magical, and are not "created out of thin air".

If you buy a bond for $5,000 on the stock market, and earn back $7,000 over the course of the time limit of the bond, did you just conjure $2,000 out of thin air? No, the $2,000 in profit is your investment income earned and profit from taking the risk in that particular bond.

Banks are no different. They take calculated risks when lending money to borrowers. If the banks could magically create money out of thin air, then why are they so picky about lending money to borrowers that don't fit their credit criteria? Why? Because when banks invest by lending money, there is always a distinct possibility that the borrower will not repay, and that their principal investment will be lost.

I have a mortgage for say $100,000. Over the next 30 years, I will repay the bank interest every single year of that loan, and the interest paid is higher towards the beginning of the loan than the latter part of the loan. I pay this interest from my personal income, by providing services to my employer.

The conspiracy nutcases seem to forget that money is fluid, and that money changes hands every day. We don't operate banks and the economy in some static, closed wind tunnel.

reply to post by CookieMonster09


Banks do create money out of thin air. But they can't make as much as they want whenever they want. It's called fractional reserve banking.

For every dollar they have on reserve they can loan out say 100. When a bank fails it can't just print money willy nill. Nor are they allowed to loan it to themselves to bail themselves out if they could. They do multiply the money supply but are only allowed to do so when loaning to someone else. They're not allowed to use the moneythemselves.

The bank can still fail for various reasons. Like everyone withdrawing their reserves which makes the bank unable to loan any money.

reply to post by CookieMonster09


For example. I put 100 cash in the bank. My account will say I have 100 but I don't. It's all digital. The bank will loan 90 of that out to someone else and put it in their account. The 10 is the reserve.

But my account still says I have 100 and his says 90. Add that up it's 190 dollars according to the computers. But there is only 100 that actually exists. The extra 90 only exists as digital money.

So how do they get away with this? Easy. It's backed up by the loan which is recorded on the bank's ledger as an asset. Eventually the 90 has to be payed back. When it is that digital 90 will be destroyed. It was never real to begin with.

See its a debt based system. Someone somewhere always has to be in perpetual debt or our money literally dries up and dissappears. This is whatg caused the collapse. After the home bubble collapsed nobody could get a loan causing debt deflation.

somes peoples on this thread's needs to do's somes more research into hows things really woiks.

there's a huge 'conspiracy' going on that defiles all notions of common sense! seriously!