Building Wealth with Silver. Thomas Herold
Читать онлайн книгу.
statements about this printing of money that earned him the nickname of Helicopter Ben, when he claimed that if the U.S. economy ever ran into real difficulties, then he could salvage it if he only had a large enough helicopter to fly around the country throwing out bales of this money that was created out of nothing to the citizens.
Bernake is a professor whose specialty dealt with the Great Depression. His statements regarding the country’s capability of electronically printing money from thin air may be controversial. You will see below that the truth is that they have evolved into a main component of the American economy in the twenty-first century.
You have to comprehend how modern money works in order to internalize how a modern day electronic printing press is able to make money from nothing. The actual currency of the U.S. does not prove to be the Federal Reserve dollars that move around the United States and its economy. Instead, the real currency turns out to be Treasury bonds and bills that are backed up by faith and credit of the government.
People, investors, and countries who hold these U.S. Treasuries receive the only guarantee of being paid by the government from taxes that will be collected from American citizens in the future. This guarantee to treasury holders is what really underlies what you use as money in the form of dollar bills.
Fortunately for the U.S. government, the U.S. treasuries’ market remains the deepest and most liquid on earth. This makes it easy for the Fed and the government to conjure new dollars out of thin air. The Fed does this by simply monetizing the debt of the government. In other words, the Fed will step into the open markets and purchase Treasuries.
When they do this, they do not pay with real dollars to the seller of the Treasuries. Instead, they simply credit the account of the seller for the action. This proves to be Bernake’s electronic equivalent that he had mentioned in his earlier speech. You are right to think that the value credited to the account of the seller does not literally exist. It is merely an on screen balance of the bank’s reserves with the Fed.
With these actions of monetizing the debt, the Federal Reserve has actually printed money from nothing. They are able to do this so long as the Treasuries market remains so deep and liquid.
The transaction also requires sufficient confidence to be present that the seller will accept the crediting of its account by the Federal Reserve. Until either of these two underlying pinnacles is called into question, then the Federal Reserve and the government will continue to have the ability to literally create money electronically out of nothing through monetizing the government’s debt.
You may be asking yourself a good question now. If the government creates money from thin air, would this not affect the value of the entire dollar money supply, both that already exists and that they are creating? The answer to the question is a resounding yes. Later in this chapter you will see start to see how this magical printing of money actually has negative consequences for the demand and value of the U.S. dollar.
Fractured Finance – Fractional Reserve Banking
This creating money by monetizing the government’s debt is not the only way that the Fed is able to create new dollars. They can also use the Fractional Reserve Banking System that underpins the modern banking of practically all countries in the world.
Fractional reserve banking significantly expands the money supply, or demand deposits and cash, beyond the level at which it would normally be.
Because of how common the practice of fractional reserve banking proves to be, the actual money supply found in the majority of nations is a multiple bigger than only the base level of money that a nation’s Central Bank creates.
The multiple itself is known as the money multiplier. This number is set by the minimum reserve requirement that the financial regulatory authorities require and impose on banks. Extra reserves that banks hold also influence the level of this multiple.
You will find that most central banks, including the Federal Reserve, generally set these minimum reserve requirements for the banks. This ensures that banks maintain at least a minimal amount of their on demand deposits in cash reserves. In such a way, the money creation performed in the commercial banking realm is controlled by the Central Bank or Federal Reserve.
This is also intended to make certain that banks possess sufficient available on hand cash to deal with typical withdrawal demands. Even though these fractional reserve minimums are intended to prevent them, difficulties can become evident if a great number of bank depositors attempt to pull out their money at once. This leads to bank runs on rare occasions. If the problems are exaggerated to banks throughout a region or are severe, it can also cause a systemic crisis in the banking system.
To help alleviate these types of difficulties and protect the system, the Federal Reserve oversees and closely regulates such commercial banks. It furthermore functions as a true lender of last resort for them. Besides this, another body, the FDIC, or Federal Deposit Insurance Corporation, insures commercial bank customers’ deposits.
Because banks are allowed to lend out a certain multiple of the deposits that they actually have, they can be utilized by the Federal Reserve to create additional money. You have already seen that they can lend out a multiple of the deposits that they have on hand. Another way of putting this is that the Federal Reserve only requires them to keep a certain percentage of loans that they make as reserves.
Typically, this fractional reserve number is ten percent. This means that for every $1 that they have in reserves, a bank is allowed to loan out $10. They are given a money multiplier of ten to one with this reserve.
So when the Fed purchases Treasuries by crediting a financial institution’s account, they are electronically increasing the reserves’ value of the bank in question. The bank is then not simply able to loan out these deposits that are magically credited to them digitally, but instead the full fractional reserve multiplier of what is typically ten to one.
This means that the Federal Reserve creates not only the money that they use to purchase treasuries with, but also the ten to one in new money that is created by a bank loaning out up to their fractional reserve requirements.
Every modern bank in the United States operates on this system of fractional reserve lending. This whole explanation may come as a shock to you, as it does to most Americans when they learn of it. Reality is that far more money is loaned out than the banks literally keep in reserves. Although there are restrictions to how much money the banks can create, you have already seen that the restrictions are mostly limited to the ten percent fractional reserve requirement.
Should the Federal Reserve Bank desire it, they can lower the reserve still further, allowing yet more money to be created as if by magic from thin air. This has profound implications for your money and its value. Later in the chapter we will examine what this means for you and your paper and electronic dollars.
From Something to Nothing – Your Money Now
In the good old days of the 1800s through 1971, money proved to be as good as gold. This is because until Nixon took the United States off of the gold standard, money was literally exchangeable for gold. This led to an incredibly stable period in the value of the dollar and other major world currencies that lasted for literally more than a hundred and fifty years.
When you look at the value of the dollar against gold from 1792 to1862 when the Civil War had begun, you see that gold closed each year in that seventy year period in the range of $19.39 per ounce to $21.60 per ounce. You witnessed a deviation of no more than 11 percent in the value of gold and hence the dollar in seventy years.
Another way of putting this is that in seventy years, the dollar had only declined around 11 percent against fixed asset gold. Similarly after the Civil War ended and recovery ensued, from 1870 to 1932 the dollar against gold remained steady around $20 to $22 per ounce. This proved to be another more than sixty year period where the dollar had no more than a ten percent deviation in value.