You Can Create Money Just Like A Bank

Lately, I have been explaining that private banks do not create the same kind of money that The Federal Reserve Bank of the USA does. The Federal Reserve Bank creates what Modern Money Theory (MMT) calls “high powered money” With fractional reserve banking, private banks create a promise that when you need the money from your bank account, they will give you “high powered money”. The private bank does not hold all the money to cover all the promises of money that it has created because it knows that only a small fraction of people will want to take out more “high powered money” from the bank than other people will put into the bank.

You can simulate doing the same thing, except for you it is illegal to do. Look up the explanation of check kiting on Wikipedia.

Check kiting or cheque kiting is a form of check fraud, involving taking advantage of the float to make use of non-existent funds in a checking or other bank account. In this way, instead of being used as a negotiable instrument, checks are misused as a form of unauthorized credit.

Private banks are chartered by the government to practice fractional reserve banking. Private individuals are not so chartered. Under normal circumstances you can’t tell the difference between the private bank’s promise of money and “high powered money”. If the private bank runs out of reserves to fulfill its promise of giving you “high powered money” when you want it, The Federal Reserve Bank in the USA rides to the rescue to provide the private bank with the needed “high powered money”.

The Federal Reserve Bank is an entity within the USA federal government that is independent of other entities within the USA federal government. (See the post Who owns the Federal Reserve?)

Leave a comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.