How the FED Increases the Money Supply

I did some research to learn details on exactly how the FED creates new money in order to increase the money supply. This is fascinating. Here is how it works:

First, fractional reserve banking rules require that the FED maintain a certain percentage of their loans in actual physical currency, like cash or government securities. In other words, they are allowed to loan their member banks money based on the amount of physical reserves they have. Another way of saying this is that the amount of money their member banks are allowed to loan out to you and I is based on how much physical currency the FED has in reserve, meaning inside the vaults of their 12 "Reserve Banks." So the question becomes, "how does the FED increase its reserves."

The FED increases its reserves (the actual hard currency stored in their vaults), by "purchasing" government securities. (I put the word "purchasing" in quotes for a reason, which I will get to in a moment.) Since the FED's reserves are now larger, they can loan more money to the member banks, who in turn loan money to individuals, businesses, other banks, etc. The multiplier effect then kicks in, which creates new money in the economy. Say I take out a $10,000 loan to buy a car. The car dealership takes my check and deposits it into another bank. That bank then just increased it's own, local reserves by $10,000. This allows them to loan out $9,000 to someone else. That person then deposits the $9,000 into a different bank, which can then loan out $8,000, etc. On down the line. In the end $90,000 of new money is created for every $10,000 initial deposit.

But the multiplier effect is not the only way the money supply increases, because when the FED purchases government securities, it does so with a FED check, which is a totally new form of money. In other words, when the FED writes a check, new money is created out of thin air. But keep reading, because things get even more interesting.

Government securities (like Treasury Bills) are paper promissory notes the government sells on the open market to raise money, which they then promise to pay back at a fixed time later, with a bit of interest. The government issues securities (various bonds, T-bills, etc.) in order to raise money, which increases the national debt, because these notes must be paid back when called upon (so long as it is past the maturation date issued on the note).

So when the FED wants to increase it's reserves, it purchases government securities with FED checks (new money remember), but it doesn't purchase newly issued securities directly from the government. It purchases them from the open market, from individuals and private institutions who have already bought them and who want to sell. These sellers then deposit the FED check into their local bank, and the multiplier effect again takes over. So the money supply increases even more.

And note that as the fed accumulates more and more government securities, the US government owes more and more money to the FED. But check this out. The FED doesn't need government money, because they are the ones who have the the power to print money anytime they want! And indeed, the FED has never sold a government security, ever. In its entire history, it has never decreased the money supply by selling its government securities and reducing its reserves. For 90+ years it has only been buying up US government securities.

This reminds of of something Anthony Sutton said. He told his father once (who was a member of Skull and Bones), that he was worried about how large the national debt was growing, and his father laughed and said, "Don't worry son. We are loaning it to ourselves." Of course, by "ourselves" he means the rich and powerful who control both the FED and the government. He doesn't mean a government representing the people. And any time it wants the FED could call in these securities, making the government pay them back. But why would it do this? Certainly not when the economy is growing, because during a period of growth it can just keep playing the same game, issuing more money so banks can make more loans and collect interest. But when the economy stops growing, when nobody is taking out more loans, the game ends, and we are left with a situation where the US government now owes a shit load of money to the FED, and the only way the government can pay back this money now is by taxing the people.

No wonder the powers that be (including wall street and the banking cartel) are supporting Obama now, and the media is saying more taxation is good. In the past, they didn't want the government to raise money by taxes. They wanted the government to raise money by issuing securities and increasing its debt. But now that peak oil has arrived and the game is up, they are going to create more taxes and transfer as much of the remaining money to them, in the form of bailouts and perhaps even by calling in their treasury bills. Maybe China will join them. Won't things be fun then!