The Other Way Dollars are “Made”.
How the Fed Affects the Money Supply — Post #8
Last post I covered how money is created through deposits at banks. This technique is called fractional reserve banking. As a review, banks only store some of the money they receive. Of the $100 you give the bank: they use $90, and store $10. Which works, until it doesn’t.
The other way money is created in the US, gets complicated, which is why I am writing about it. The only way to appreciate the simplicity of Bitcoin is to understand the complexities of the current system.
Every bank stores money at one bank. This bank is the central bank or (in the US) the Federal Reserve a.k.a. “the Fed”.
Banks and the government can use accounts at the Fed the same way citizens use private banks. The Fed also participates in trades at their discretion, but they can do so by crediting accounts, not trading existing currency. This is a huge deal. Private companies can buy/sell assets to the federal reserve. When the Fed buys it puts money into the economy, increasing the money supply. When the Fed sells, it takes money from the economy, decreasing the money supply. This is how the Feds effects the total money supply in the economy. While actual physical cash dollars are not increased, the money supply can be increased drastically.
How drastically?
This is post #8. The others are located here.
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