Put simply the job of the Federal Reserve is to stabilize the rate of inflation and maintain full employment as set forth in the Federal Reserve Act of 1913, the Employment Act of 1946, and the Full Employment and Balanced Growth (Humphrey-Hawkins) Act of 1978. Among the charges of the cabinet level post of the Department of Treasury is the production of coinage and currency. The creation of money is central to the health of the economy.
Money is created by the Federal Reserve depositing funds in a bank. The bank then proceeds to reserve a portion of such deposit. The reserve rate is established by the Federal Reserve. In an effort to simplify this action let’s assume that the bank, after reserving the required portion of the deposited funds, lends all excess money from the deposit. As a result of such scenario playing out money has been created. Such an exercise would play out like this: 1. The fed deposits $1,000 dollars in a bank 2. The bank reserves $100 dollars of such deposit 3. The bank lends the remaining $900 dollars of this transaction. At this point in the process the money lent is considered a checkable deposit and appears on the books of the lender as vault cash and cash loaned and on the balance sheet of the borrower as vault cash. Therefore, the $1,000 dollar deposit, after taking into consideration the portion of such funds reserved by the lender, is considered a checkable deposit of $1,900 dollars. The illusory $900 dollars resulting from this exercise in fractional reserve banking, a process the government approves of, make the value of existing dollars decrease while falsely bolstering the economic confidence of consumers and manufacturers.
Keeping in mind that the main charges of the Fed are stabilization of the rate of inflation and the maintenance of full employment it is not conceivable that the Fed would not welcome the creation of illusory money. Such funds would surely give manufacturers the confidence to extend themselves beyond their means and further invest in the resources needed to meet the increasing demand for products and services supplied as a result of the booming economy. While the full employment part of the equation is being satisfied a blind eye is being turned toward the resulting inflation. In an effort to hide the problem of increasing inflation, the Fed injects into the economy another dose of fiat money issued by the Treasury Department and backed by nothing more than the legal tender wording inscribed on it’s face. While the true objective of such practice is unknown to the common man two things are certain. Americans do not wish to relive the economic conditions that befell the Carter presidency and the ghost of Alan Greenspan will wander the halls of the Federal Reserve for many years to come.