Chapter XI More of the Steps in the Creation of Money

First, there is the Reserve, authorities power to write a cheque against no funds. Page 85 of Reserve Booklet: "Federal Reserve Bank credit . . . does not consist of funds that the Reserve authorities "get" somewhere in order to lend, but constitute funds that they are empowered to create. The process of creation is one of giving the promises of the Federal Reserve Bank — in the form of Federal Reserve Notes and Reserve deposits — in exchange for the promises made by others to the Federal Reserve Banks, the reason for the exchange being that the Federal Reserve Banks' promises are recognized BY LAW as having a particular monetary utility not possessed by the promises of individuals or of private institutions." That simply means that the Federal Reserve authorities can write a cheque against no funds or give the sellers of securities to the Reserve Banks deposit credits on their books. These securities are (a) U.S. Bonds, (b) Corporation stocks, or (c) investment obligations, which the member banks may sell (or deposit with them) — and the member banks get; credit to their reserve funds. If the Reserve authorities should pay for the securities (promises of others to pay) with Federal Reserve notes, instead of just giving the seller deposit credits on its books to the seller, it would mean nothing, because the Bureau of Engraving and Printing (the Treasury) prints reserve notes for Reserve Banks at a cost of only 30 cents a $1,000. To follow that course would be both perfectly silly and useless; for the seller of the investment obligations would have no use for the cash, he would just deposit the money in the bank, receive deposit credit against which he could write cheques. The Reserve Banks are now very careful to say, "We buy U.S. Bonds and pay for them with Reserve notes." Bankers are fighting