_The Truth About The Federal Reserve And How It Creates New "Money"_
It's "fractional reserve banking," all the way down.
FTA: The Federal Reserve is not permitted to use the funds it has on deposit from its member banks to make loans. That could conceptually be construed as a reserve requirement of 100%, but that's not how the laws governing its operation frame it. Instead, the Federal Reserve just creates the money for the loans it makes by adding to the balance of the recipient bank’s “reserve account” that each member bank maintains at the Federal Reserve, while simultaneously deducting the exact same amount from its own “asset account” that the Fed maintains for each of its member banks (which can have a zero or negative balance, and whose balance will initially be zero until the member bank borrows money from the Fed for the first time.)
Accounting for bank transactions in that way is as required by the accounting methodology known as “double entry accounting,” whereby each transaction must have both a source and a destination account, such that the absolute balance of one of the accounts much change by the additive inverse of the change to the other. For example, a $1000 loan must be recorded as a $1000 credit to the borrower’s account, but also as a $1000 debit to the lender’s account.
That's also how the Federal Reserve creates new money "out of thin air”—which is only possible because the “money” the Fed loans is not physical, only symbolic. Key point: It’s not the “double entry accounting,” per se, that enables that, it’s the fact that accounts are allowed to have negative balances, which in turn is enabled by the fact that the accounts involved don’t have to emulate the behavior of physical objects.
When a loan is repaid to the Federal Reserve, the account that was credited when the loan was made is instead debited, and the account that was debited is instead credited. So, when a member bank repays a loan it had received from the Federal reserve, its reserve account balance decreases by the amount of the repayment, but the asset account balance that the Fed maintains for that borrower increases: It rises from below zero towards zero (or reaches zero, if the repayment means that the borrowers then owes nothing more to the Fed.) In other words, the created funds go back to where they came from: Into the void.
Full essay: https://open.substack.com/pub/grumpyrabbit/p/the-truth-about-the-federal-reserve
GrumpyRabbit /
npub10q…aewu8
2024-10-30 17:14:12
Author Public Key
npub10qy7pkdyht8y9tzar2guerw9x2z4y0wn3wnzcjny92c29zj3fvkqkaewu8Published at
2024-10-30 17:14:12Event JSON
{
"id": "aa5c7d784c58873f21cffc31f0a3aa6e67828cc1ce31792f399422a28175cfb9",
"pubkey": "7809e0d9a4bace42ac5d1a91cc8dc53285523dd38ba62c4a642ab0a28a514b2c",
"created_at": 1730308452,
"kind": 1,
"tags": [
[
"proxy",
"https://social.teci.world/objects/5667dcf7-d229-44bc-ae8f-fc2a51582063",
"activitypub"
]
],
"content": "_The Truth About The Federal Reserve And How It Creates New \"Money\"_\n\nIt's \"fractional reserve banking,\" all the way down.\n\nFTA: The Federal Reserve is not permitted to use the funds it has on deposit from its member banks to make loans. That could conceptually be construed as a reserve requirement of 100%, but that's not how the laws governing its operation frame it. Instead, the Federal Reserve just creates the money for the loans it makes by adding to the balance of the recipient bank’s “reserve account” that each member bank maintains at the Federal Reserve, while simultaneously deducting the exact same amount from its own “asset account” that the Fed maintains for each of its member banks (which can have a zero or negative balance, and whose balance will initially be zero until the member bank borrows money from the Fed for the first time.)\n\nAccounting for bank transactions in that way is as required by the accounting methodology known as “double entry accounting,” whereby each transaction must have both a source and a destination account, such that the absolute balance of one of the accounts much change by the additive inverse of the change to the other. For example, a $1000 loan must be recorded as a $1000 credit to the borrower’s account, but also as a $1000 debit to the lender’s account.\n\nThat's also how the Federal Reserve creates new money \"out of thin air”—which is only possible because the “money” the Fed loans is not physical, only symbolic. Key point: It’s not the “double entry accounting,” per se, that enables that, it’s the fact that accounts are allowed to have negative balances, which in turn is enabled by the fact that the accounts involved don’t have to emulate the behavior of physical objects.\n\nWhen a loan is repaid to the Federal Reserve, the account that was credited when the loan was made is instead debited, and the account that was debited is instead credited. So, when a member bank repays a loan it had received from the Federal reserve, its reserve account balance decreases by the amount of the repayment, but the asset account balance that the Fed maintains for that borrower increases: It rises from below zero towards zero (or reaches zero, if the repayment means that the borrowers then owes nothing more to the Fed.) In other words, the created funds go back to where they came from: Into the void.\n\nFull essay: https://open.substack.com/pub/grumpyrabbit/p/the-truth-about-the-federal-reserve",
"sig": "68e11c2d166651ffc36bebca4c223b453c86ce135f71ae99ef457aa8753c894dec3a08c3839262d237ee0b8eb9d19225cefec9e501e0b7372b23a677ea9f2507"
}