Proof of Fed actually printing up money?

[demoisedrawings]

I have been a believer in Austrian economics for several reasons. However I still like to ask the question: Does the Fed print up money at will? Any one who can provide a solid reference to source is welcome. When I read something I can cling to because to me it provides answers to economic woes, I still believe it necessary to question the veracity of this claim. I recently read a little bit of a book my father suggested I look at. In it, it was explained that the Fed regulates the banks reserves and loans. In times of economic stress, the Fed requires banks to keep more reserves on hand. When the economy is better at other times, the Fed encourages banks to make more loans and in this way the banks will make more money. So in this way it would seem that the existing money supply is expanded and contracted when need be. But this process doesn't sound like it involves the actual printing up of more money?

[Original_Intent]

Money is created from thin air in two ways:

1. When governemnt spends more than it taxes. The Treasury rights them a check, essentially.

2. Fractional Reserve banking. They don't loan out deposits - they hold those as reserves! They then make loans out of thin air for up to 12.5 times what they hold in reserves (deposits)

That's over simplified and I am not sure of the book keeping mumbo jumbo that makes it work, but that's my understanding of how it works in a nutshell - anyone want to correct that?

[Fox McCloud]

Basically, in order to increase the money supply the Fed writes a check to purchase something on the open market; traditionally it's always bought government securities (which, I think are issued by the Treasury). When it writes the check for the securities, that is the actual mechanism that's always referred to as "printing of money out of thin air".

G. Edward Griffin covers this in more depth in the chapter that talks about the Mandrake Mechanism, in his book "The Creature from Jekyll Island: A Second Look at the Federal Reserve"

fractional reserve banking is actually different than what Original_Intent said; how it really works is this:

Bank A has $1000...because of the 10% reserve requirement, they must keep at least $100...so they loan out $900 to person A. Person A buys a lawnmower for $900, giving the check to Person B. Person B then takes the check and deposits it at Bank B. Bank B now has $900 in deposit...they can loan out up to 90% of this, thus they can loan out $810 to Person C....(now, filling in the blanks with similar scenarios on down the line) the next bank will loan out $729, then $656.10, then $590.49, then $531.44...and so on.

eventually (provided no loans are payed off), the banking system creates x9 more money than was originally in circulation. This only happens with a 10% reserve requirement; if the reserve requirement is higher, the "money multiplier" will be less than x9, and if it's lower, the money multiplier will be greater than x9.

[Bruno]

Basically, in order to increase the money supply the Fed writes a check to purchase something on the open market; traditionally it's always bought government securities (which, I think are issued by the Treasury). When it writes the check for the securities, that is the actual mechanism that's always referred to as "printing of money out of thin air".

G. Edward Griffin covers this in more depth in the chapter that talks about the Mandrake Mechanism, in his book "The Creature from Jekyll Island: A Second Look at the Federal Reserve"

Just got my copy today! It's a big read, but looks easy to pick up and read any chapter, and has the summaries at the beginning.

[Fox McCloud]

http://www.geocities.com/rebornempowered/mandrake/mandrake.htm#Anchor-flowchart

this guy explains it in greater detail; I don't have time, ATM, to heavily scrutinize it, but it looks basically accurate (at least the initial governmental side; not sure about the fractional reserve banking part).

[foofighter20x]

The money doesn't have to be physically created. The Fed can just allow a bank to go to any computer and put cash in your account.

"Oh, I now have $1M extra to spend. Yay bookkeeping entries!"

[Zippyjuan]

The money is created via loans- credit. Banks can borrow money from the Fed to meet their needs and that includes the ability to loan that money to customers. With a reserve requirement (usually 10% but it can vary) the banks are required to keep ten percent of all of their deposits on reserve or hold against possible withdrawls by people who have made deposits.

As Fox McCloud says, if I deposit say $1000 into the bank, that also increases the money the bank has and with a ten percent reserve requirement, they can loan out $900 of that to someone else. That person can deposit that money into the same or another bank if they do not spend the loan or received the money as payment for something. Now there is an additional $900 deposit and 90% of that can be loaned out to someone else. If carried out to infinity, you get about a multiplication of nine times the amount of the original deposit. But when that person pays off their loan or the bank repays its loans from the Fed, the money supply contracts and the multiplication of the money supply stops for that loan because the bank no longer has your deposit from which to it can loan against because you no longer have the money you borrowed on deposit. The money supply only grows as long as there are more loans being taken out than being paid off. Right now, the supply of money is contracting because few loans are being issued- to individuals or businesses. That is why the Fed is trying to add more money.

The Fed can also buy and sell securities for the Treasury like T-bills. If the Fed is selling notes, they are basically taking a loan from the person they buy the note from. This reduces the supply of money. If they are buying securities, they are paying off a loan to the government and this puts more money into the system.

You can find a brief overview of how the Fed works here: http://money.howstuffworks.com/fed.htm