[But first a word on bonds for those readers whose understanding of them might have become a bit foggy: Bond issuers promise to repay, with interest, the bond buyer who is the recipient and holder of the bond that he purchases with money paid to the bond issuer, who is usually either a government agency or a corporation temporarily in need of some major funds. Investors buy bonds to get a relatively secure rate of interest or return on their investment. At the end of the term of the bond loan, the government agency or corporations repays the principal, plus interest (if not paid periodically) to the bond buyer, and the paper on which the bond was printed is destroyed, since the prescribed and agreed-upon sequence of financial transactions is now complete. Keep in mind that at any given time there are trillions of dollars worth of such bonds in existence.]
Now, as promised, here is the Fed-and-private bank money-creating process explained in greater detail:
- Step 1. The Fed Open Market Committee approves the purchase of U.S. Bonds on the open market.
- Step 2. The bonds are purchased by the New York Fed Bank from whichever bond buyer-owners has them in their possession and are now offering them for sale on the open market.
- Step 3. The Fed pays for the bonds with electronic credits to the seller's bank, which in turn credits the seller's bank account. These electronic credits are based on nothing tangible. The Fed just creates them with key strokes on their computer's keyboard.
- Step 4. The banks then use these deposits as reserves (fractional reserves), on the basis of which they are, by law, allowed to loan out ten times (10x) the amount of their reserves to new borrowers, all at interest. Where does the money come from, that they loan out? Like magic, it comes out of thin air; quite incredibly it is "created" (i.e. comes into existence) in the very process of their making the loan! The more magicmoney they loan out, the more real money that is created. And on all of this money that is magically created and then loaned out, they collect interest! (What a racket! Problem is, someone eventually has to pay for all this wealth that bankers generate for themselves from our current monetary system. And who would you guess that someone is? It is you the taxpayer. Read on and find out exactly how this works. Find out how you are being systematically robbed, and what you can do to put a stop to it.)
In this way, a Fed purchase of, say a million dollars worth of bonds, magically "becomes" 10 million dollars in bank deposits. The Fed, in effect, creates 10% of this totally new money and the banks, by way of fractional reserve lending, create the other 90%.
This also explains why the Fed consistently holds about 10% of the total US Treasury bonds. It had to buy those bonds (with accounts or Fed notes the Fed simply created out of thin air) from the public in order to provide the base for the rest of the money that the private banks then get to create, most of which eventually winds up being used to purchase Treasury bonds, thus supplying Congress with the borrowed money it needs to pay for its expenditures.
Due to a number of important exceptions to the 10% reserve ratio, some loans require less than 10% reserves, and many require no (0%) reserves, thus making it possible for banks to create many times more than ten times the money they have in "reserve." Due to these exceptions from the 10% reserve requirement, the Fed creates only a little under 2% of the total US money supply, while private banks actually create the other 98%.
To reduce the amount of money in the economy, the process is just reversed: the Fed sells bonds to the public, and money flows out of the purchaser's local bank. Loans must then be reduced by ten times the amount of the sale. So a Fed sale of a million dollars in bonds, results in 10 million dollars less money in the economy.
By these two methods, the Fed (a privately owned group of banks) controls and determines the total amount of money in circulation. What Kucinich is proposing is that all this legerdemain (in which billions of dollars are essentially skimmed off the top by banksters) be replaced by a system in which the Congress of the US is alone responsible for the size of the money supply and the issuance of the money that is nationally in use.
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