2012년 3월 1일 목요일

Some readings on the Federal Reserve System


What is the Fed? A Private Profiteer or a Government Agency?

(...) It is important to understand the responsibilities and the now-expanding actions of this almost 100-year-old institution as it ursurps even greater power to control our financial future.

(...) We see their imprint today on our paper dollars. Dollar bills are officially indentified as Federal Reserve Notes because they are issued by the Federal Reserve, fashioned something like a note to borrow. The Federal Reserve issues the Federal Reserve Notes as a liability on its balance sheet, which is held against assets that were composed mostly of treasuries of the federal government.

(...)

The official duties of the Federal Reserve (as described by its own document ..) fall into four general areas:
  1. Conducting the nation's monetary policy by influencing the monetary and credit condition in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.
  2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers. 
  3. Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
  4. Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including a major role in operating the nation's payment system.
(... Some remarks on Federal Funds rate: ...) The actual rate can be different from the target, bu the  Federal Reserve will intervene to drive the rate higher or lower to achieve its anounced target. A decade ago, the Federal Reserve didn't even announce what its target ws, hiding behind the screen so that market participants would have to assess from the Federal Reserve actions what the Fed's policy target rate was. We now sit at the unusual situation of the Federal Reserve having lowered its interest rate to an official range of between 0 percent and a quarter of a percent, with the idea that low rates should help stimulate the economy, allow for loans to be provided at relatively low rates so that businesses and consumers will borrow to spend, and generally expand economic growth. The rate has never been lower. 

The United States banking system has been called a Fractional Reserve System because the regular commercial banks (...) are required to keep only a fraction of their deposits on reserve at the Federal Reserve to back up their deposits. They rest they can loan out to make profits.

In the original design of the system, the fraction of deposits required to be placed with the Federal Reserveㅡcalled the reserve requirementㅡwas an important policy tool to expand and contract the ability of banks to make new loans and thereby multiply the amount of credit and deposits throughout the system. The reserve requirement percentage has been decreased, and the kind of funds against which reserves are required then also decreased, so that currently we are in a situation where there is in effect almost ^no^ requirement for banks to have reserves at the Fed. Although the requirement structurally exists, the dollar amounts are so small as to have little effect on the operations of banks. Basically, commercial banks run into other limitations (such as their capital adequacy) before they are limited as to how much they can loan out. Consequently, since this policy tool is no longer effective it is rarely discussed.

The legal structure of the Federal Reserve is often debated as to whether it is a private entity with independence from the federal government or if it is really a branch of the financial operations of the federal government. There are 12 branches of the Federal Reserve Bank scattered across the regions of the country, and the board of governors operates out of Washington, DC.

Key leaders and presidents{really presidents in plural?? not the president in singular??} are appointed by the President and confirmed by Congress. Legally, the Federal Reserve exists as an independent corporation whose shares are owned by commercial banks which are members of the Federal Reserve System. Mainly, that means there are shares held by the large banks of the country. These shares pay a modest dividend, but in comparison to other flows, the influence of the shareholders is nonexistant.

While the legal structure exists for independence, the reality is that the Federal Reserve is very much at the center of the policymaking activities of the federal government by coordination with the Treasury. There should be no mistake that ^the Federal Reserve is not an independent entity.^ It is the branch of the policymaking and implementation aspects of our financial system as directed in coordination with the federal government.

Their other main constituents are the commercial banks of the United States, which they are charged with supporting and regulating. The investment banks (which deal with issuing corporate shares) were not directly regulated by the Federal Reserve, but in the financial  crisis of 2008-09 almost all investment banks of any size converted themselves into bank holding companies. That structure allows investment banking and commercial banking to coexist under the same corporate structure, (...)

The important point of this discussion of bank regulation is to notice that the Federal Reserve acts to support the banking system in its primary role as the bank's bank, to ensure the strength and viability of all banks in the United States. So the Fed has a separate loyalty to the banks.

Who Benefits from the Fed?

The dictum "Follow the money!" involves determining for whom the Federal Reserve works. Most people don't realize that the Fed is a private corporation that made a profit of about $45 billion last year. It holds something like $700 billion of government Treasuries on its books that pay interest of around 4 percent, or $28 billion of income. In any normal corporation, those profits would be distributed to the shareholders. But for the Federal Reserve, profits are freely contributed back to the Treasury of the U.S. government! In essence, they turn in their profits to contribute to keeping the federal deficit a little lower.The chairman and governors are appointed by the president and approved by Congress, so it's pretty clear that the Fed is in bed with the federal government.

It's also pretty clear that the Federal Reserve, on a day-to-day basis, does everything it can to support, bail out, and only loosely regulate its shareholdersㅡnamely, the big banks. The origin of the Federal Reserve, which was concocted by big bankers in a secret meeting on Jekyll Island off the coast of Georgia, indicate its founding mission of supporting the bankers.

It is my conclusion that the Federal Reserve acts as a handmaiden for the banks and also the policy tool for the federal government. The role of leadership requires balancing the conflicting goals of its different constituents. Notice who is not represented: the general public!

The Federal Reserve's responsibiities are officially assigned two somewhat conflicting objectives:
  1. To support the dollars that it issues, in such a way that they maintain their value
  2. To support the growth of the overall economy
The conflict arises between the obvious balancing act of supporting the dollar by keeping interest rates high and, on the reverse side, supporting the economy by keeping interest rates low, thereby making loans easier to obtain. The problem, of course, with low interest rates and expanding debt is that combination can lead to inflation, which decreases the purchasing power of the dollar. So the two goals are in conflict. The Fed has to navigate to what it believes is a happy medium.

(... ...)

자료 2: Plenty of Nothing: The Downsizing of the American Dream and the Case for Structural Keynesianism


Reforming the Federal Reserve Bank, Or Did You Know That the Fed Was Owned by Citicorp?

The tendency of central bankers to favor finance capital is reinforced within the United States by the institutional structure of the Federal Reserve. To most people's amazement, the Federal Reserve Bank is not a government agency but is in fact privately owned by the commercial banks that are members of the Federal Reserve System. The name Federal Reserve gives the impression of a government agency, but in fact the Fed is a private corporation whose stockholders are private commercial banks. In effect, the Federal Reserve is a bankers' club.

The private banks profoundly influence the Fed. In addition to the Board of Governors which is located in Washington D.C., 12 regional Federal Reserve Banks are located in Boston, New York, (...) and San Francisco. The 12 district banks are locally owned and controlled. The President of each of these banks is appointed by its board of directors, of which one third are from the regional banking community and one third are from the regional business community. In this fashion, finance and industry control the regional Federal Reserve banks.

The Board of Governors, which has overall responsibility for the Federal Reserve System, consists of 7 members, nominated by the President of the United States and confirmed by the U.S. Senate. However, these 7 have 14-year terms and cannot be dismissed except for criminal behavior or gross incompetence. Thus, any sitting President can only expect to appoint two or three governors.

Interest rates and the direction of monetary policy are set by the FOMC, comprising 12 members, 7 of whom are from the Board of Governors, and 5 of whom are presidents of the regional Federal banks. The fact that 5 are regional Presidents gives the financial community enormous direct influence over the Federal Reserve policy. Moreover, members of the Board of Governors also tend to be drawn from the financial community, thereby reinforcing this influence. Consequently, the institutional structure of the Fed imbues monetary policy with a bias that favors the bond market and works against families and small business.

Changing Diection: America Needs A Family-Friendly Federal Reserve.

(... ...)

자료 3: The economics of happiness: building genuine wealth

How Money Is Created?

(...) The current money systemsㅡwhether private banks or national banksㅡcreat money in parallel with debt and literally with no relationship to the actual life conditions or needs of a community. In short, all money is effectively in the form of a loan, a debt which commands interest payments and is ultimately a permanent claim on the genuine wealth of individuals, families, businesses, governments and society. This process of money creation was confirmed by England's former central banker(Chancellor of the Exchequer) the Rt. Hon. Reginald McKenna: "I am afraid that the ordinary citizen whould not like to be told that banks or the Bank of England, can create and destroy money. The amount of money in existence varies only with the action of the banks in increasing and decreasing deposits and bank purchases. Every loan, overdraft or bank purchase creates a deposit[,] and every repayment of a loan, overdraft or bank sale destroys deposits."[n22]

(... ...)

If money is nothing more than an agreement and money is created largely by banks which are businesses charteded to create the money, what would prevent us from no longer believing in the monetary system or withdrawing our consent? The problem is that it's not easy trying to live outside of a ubiquitous system; for the vast majority of people who have limited financial wealth there is no alternative or escape from debt financing our lifestyles. Moreover, there is no escaping from what economists call inflation.

(...) Margarit Kennedy explains that the role of inflation in our economic system is misunderstood and is not natural at all. She notes that inflation is just another form of taxation which governments uses to overcome the worst problems of an increasing interest burden. When governments print money to reduce their debts inflation results.[n31] I have also challenged the conventional definition of inflation: if most money is created in the form of a debt of loan by private banks, inflation is really an increase in money supply through issuance of debt. It is not physical assets, labor, or natural resources which are inherently scarce but rather it is money which is made artificially scarce. One might agree that this is truly a form of magic or a form of systemic slavery in which we are all collectively participating.

The role of the central bank in money creation

A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the Nations and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the worldㅡno longer a Government of free opinion no longer a Government by conviction and vote of the majority, but a Government by the opinion and duress of small groups of dominant men.  ㅡ US President Woodrow Wilson [n23]

(...) While in principle central banks should be operating in the interests of the people's happiness and well-being, most are no different than private banks. Interest rates are adjusted the way the fuel injection system on a vehicle is operated, to provide just enough new money in the system to sustain economic growth.

You may believe that central banks are public institutions of the government. However in the United States, the Federal Reserve Bank is a privately-owned institution consisting of 12 regional banks. It is owned and controlled by member banks, which are themselves privately owned bank corporations. The US Fed is the most powerful institution in the country since it controls monetary policy, interest rates, the issuance of money, the control of reserve requirements for private bank loans and ultimately the entire economic destiny of every citizen. However, because the FEd is a private corporation, the constituent member banks receive approximately 6% profits on funds paid into the Fed, no matter the economic conditions.

With its establishment in 1913, the seniorage over money creation in the US fell into private hands. Edward G. Griffin examined the secret meeting on Jekyll Island in Georgia at which the Federal Reserve conceived. This meeting created a banking cartel designed to protect its members from competition; a strategy was also developed to convince Congress and the publiv that this cartel was an agency of the United States government. Griffin identifies seven man who were present, representing an estimated one-fourth of the total wealth of the entire world. They were:
1. Nelson W. Aldrich, Republican whip in the Senate, Chairman of the National Monetary Commission, business associate of J.P. Morgan, farther-in-law to John D. Rockfeller, Jr.
2. Abraham Piatt Andrew, Assistant Secretary of the United States Treasury
3. Frank A. Vanderlip, president of the National City Bank of New York (the most powerful of the banks at that time) representing William  (... pp 192-195 is unavailable ...)


자료 4: Money And the Federal Reserve System: Myth and Reality (G. Thomas Woodward )
출처: Federal Reserve System: background, analyses and bibliography

For a long time, few people were aware of the Federal Reserve (Fed). This is no longer true. Over the last two decades, awareness of the institution has increased considerably. Most people know that it has something to do with interest rates. A fair number can identify it with monetary policy.

But a great deal of mystery still surrounds the organization. In part, this is due to its unique structure. The blending of private and public institutional arrangements, and the independence it has in making policy, make it an anormalous structure in government. The mystery is compounded by secrecy.  The deliberations of the organization's policy-making body are revealed only after a time lag. And independent audits of the organization are somewhat circumsribed.

These characteristicsㅡand the enormous influence that the Fed has over economic conditionsㅡhave given rise to a great deal of conjecture concerning its nature and operations. The theories and suspicions about the system underlie monetary reform proposals frequently advanced by citizens, as well as various complaints and petitions sent to the Members of Congress.

Many of these claims asserted about the Fed are untrue. Others are only partially true. This report addresses various claims about the Federal Reserve Systemㅡspecifically those that are a matter of fact and can be either verified or refuted.

Structure, Authority, And Powers

Creation of the Fed

The Federal Reserve System was created by the Federal Reserve Act of 1913. Some literature on the Fed implies that the Act was passed surreptitiously, hastily or even illegally.

Although the Act was passed in the final days of the legislative session, it had been debated for some time in earlier versions. A bil to create the Federal Reserve System was introduced in the House of Representatives in late summer, 1913. The house passed, 299 to 68, its versions in December 22, 1913. ^The Act was passed by the House of Representatives by a vote of 298 to 60, and the Senate in a vote of 43 to 25.^ It was signed into law by President Woodrow Wilson on December 23, 1913.

It is often claimed that the Federal Reserve Act originated in a secret meeting of bankers on Jekyll Island, Georgia in 1910, who then mananged a conspiracy to guide their plan to enactment. Reliable evidence exists that such a secret conference took place. The conference appears to have played an important part in shaping what became known as the "Aldrich Plan."[n1] The secrecy was most likey an effort to publicly distance the plan from the "Wall Street bankers" that had a role in developing it.

^The Aldrich plan however, did not become law.^ By the time Republican legislators introduced the proposal for a "National Reserve Association"(NRA), the midterm elections of 1910 changed control of the Congress from the Republicans to the Democrats. Thus, despite (or because of) President Taft's interest in the legislation, it did not even come before the house for a vote. By the time the Federal Reserve Act was introduced Senator Aldrich had left the Senate, and the Democratic party controlled both the Congress and the White House.

The proposal for an NRA was different from the Federal Reserve System in a couple of important ways. First, it was like a central bank in that it was private. Although its 46 directors included (...), the Association clearly would have been in control of people elected by the banks. Second, even though it had 15 administrative districts, the NRA was centralized into a single entity.

In contrast, the Federal Reserve System was created as a hybrid-public operation in which the Federal Reserve Board was a federal agency appointed by the President. Moreover, in the system as it was created in 1913, the 12 regional Federal Reserve Banks were regarded as relatively autonomous, such that total monopolization of reserves was believed to be avoided.[n2]

The proposed NRA and the Federal Reserve were both viewed as systems for stabilizing credit flows and servicing the payments system, and not as agencies for making explicit monetary policy.

Public or Private

The public/private nature of the institution has given rise to the claim that the Fed is a "private corporation." This claim is not correct. Part of the system consists of private corporations. Part is a federal agency.

^The Board of Governors of the Federal Reserve Systems{System in singular??} is a government agency.^ Its employees are employees of the federal government, paid in accordance with federal government pay acres, and part of the federal employment retirement system. The premises are federal government property. The seven Board members are appointed by the President with advice and consent of the Senate in the same fashion as other government appointees.

Under the supervision of the Board of Governors are 12 regional Federal Reserve Banks. These are private institutions with certain privileges granted to them, restricted to conducting business specified by the Federal Reserve Act. As private institutions, they are "owned" by the "stockholders," they make their own pay and hiring policies, and they pay local property taxes.

For some purposes, however, they are treated as instumentalities of the federal government. They examine, regulate, and supervise some operations of their member banks: a public functions. Hence, they are exempt from state and loval ^income^ taxes. They also are treated as government agencies with respect to certain statutes. But for most other purposes, the 12 regional banks are legally regarded as private.[n3]

[n3] For a more detailed description of the public/private nature of the banks, see Federal Reserve Banks: Federal or Private Entities? By Maureen Murphy. CRS Report 89-508 A, August 1989. 15.p.

The system as a whole is subject to congressional oversight. As required by law, twice a year the Chairman of the Board of Governors must consult with the House and Senate Banking Committees concerning the conduct of monetary policy. Other Federal Reserves actions and policies are also subject to the scrutity of the Congress.


Control of the FED

Each regional Federal Reserve Bank has 9 directors. 6 of these directors are selected by the member banks that own it("class A" and "class B" directors). The other 3("class C") are appointed by the Board of Governors. The Chairman and Deputy Chairman of each regional Federal Reserve Bank are appointed by the Board of Governors from among the class C directors. The directors oversee operations of their Bank, select the President and first vice President of their Bank (and determine their salaries) ^all subject to overall supervision and approval by the Board of Governors.^

Because the regional Federal Reserve Banks are privately owned, and most of their directors are chosen by their stockholders, it is common to hear assertions that control of the Fed is in the hands of an elite. In particular, it has been rumored that control is in the hands of a very few people holding "class A stock" in the Fed.

As explained, there is no stock in the ^system^, only in each regional Bank. More important, ^individuals do not own stock^ in Federal Reserve Banks. The stock is held only by banks who are members of the system. Each bank holds stock proportionate to its capital. Ownership and membership are synoymous. Moreover, ^there is no such thing as "class A" stock.^ All stock is the same.

This stock, furthermore, does not carry with it the normal rights and privileges of ownership. Most significantly, member banks, in voting for the directors of the Federal Reserve Banks of which they are a member, do not get voting rights in proportion to the stock they hod. Instead, each member bank regardless of size gets one vote. ^Concentration of ownership of Federal Reserve Bank stock, therefore, is irrelevant to the issue of control of the system.^


Banks and Control of Monetary Policy

While the Board of Governors exercises overall supervision, and exclusively, controls some aspects of the system, such as discount rates and banking regulation, monetary policy is mostly determined by the Federal Open Market Committee(FOMC). This committee conists of the 7 members of the Board of Governors, the president of the NYFRB, and 4 of the remaining 11 regional Federal Reserve Bank presidents (the latter on a rotating basis). Majority controls, thus, still rests with the presidentially appointed Board members.


The presence of the regional Federal Reserve Bank presidents on the Committee causes some concern about the influence of bankers in the making of monetary policy. They are chosen by direcrtors who are largely chosen by the member banks themselves. (However, they are chosen only with the approval of the Board of Governors.)[n4] Further concern arises from the "Federal Advisory Council," dating from the system's creation, which provides bankers confidential and direct input into the consideration of the Federal Reserve policies.[n5]

Consequently, monetary policy is partly under the influence of persons not appointed by the President or approved by the Senate. The arrangement raises the possibility that some conflict of interest exists, since these members of the FOMC might be inclined to pursue monetary policies that increases bank profits instead of promoting the general economic well-being of the country.[n6]

How The Federal Reserve System Works

Creating Money


The economy principally employs two methods of engaging in transactions. One is cash. The other consists of debiting accounts. Banks are central to both methods.

In the case of cash, banks stand as a source of cash for customers. The Federal Reserve, in turn, is the source of cash for banks. Paper currency is printed in the Treasury department's Bureau of Printing and Engraving. It is then "sold" to the Federal Reserve Banks at the printing cost, roughly 3 to 4 cents per note, regardless of denomination. Banks keep accounts with the Fed and when they require cash for their customers, they buy it at face value, having their accounts debited. In the process, the Federal Reserve profits by the difference between the printing cost and the face value (less the costs of the operation).

But most transactions are not conducted with cash. In most cases, members of the public maintain accounts at depository institutions and pay by authorizing a transfer from their account to the account whomever they are paying. Many of these authorizations occur by means of check. Many others are effected by means of various electronic transfers. In every case, one account is debited, and another credited, completing the transaction.

Since many institutions are involved a clearing mechanism must exist to make these transfers across the different banks. In additionㅡbecause for any bank on any day, debit and credits do not equal each otherㅡit is necessary to maintain balances to handle the net difference. The Federal Reserve acts as the clearinghouse for most of these transfers.[n7] It, therefore, is the banker's bank, and holds balance of its members. These clearing balance are supplemented by requited balances("required reserves") mandated by law. Banks do not earn interest on the balances at the Fed, so that the Fed makes a profit from them in the same way it makes a profit from issuing currency.

The balance available to serve as reserves place a limit on the amount of money that can be generated by banks. To ensure sufficient reserves on hand for clearing debit and to serve the daily cash needs of their customers, banks must be careful not to lend out all of the funds deposited with them, and to always keep some on hand (see below).

More balance can be created by the Fed as it chooses. It does this by entering the open market and buying securities (i.e., interest-earning debt of the government). To purchase securities, it essentially writes a check on itself. The bank that ultimately receives this payment as a deposit gets its accounts with the Fed credited by the amount, allowing it to make additional loans. The Fed can achieve the opposit by selling a security that it brought sometimes in the past. In selling the security, it receives a payment on an account at a bank, which gets its account debited (and which will find it must cut back on its planned lending activity).

As a result, the buying and selling of securities on the open markets is the principal means by which the Fed influences the money supply. Buying securities, it injects money into the system. Selling them, it removes money from the system. Between augmenting these accounts (creating reserves) and selling currency, the Fed acquires a large portfolio of interest-earning securities that provide a profit.

One method of creating money does not earn profits for the Fed: coins. The system of metal coins is somewhat different. Coins, too, cost only a fraction of their face value to create (being mostly "clad" coins made of nickel, zinc, and copper). But in the case of coins, the FEd pays face value to the mint, with the profits being place in a revolving coinage fund. The effect on the economy is the same, and it has the same implications for real government outlays and income. Only the accounting differs.


Commercial Banks and Fractional Reserves

At the base of the system, of course, are banks (and credit unions and savings and loans). These institutions are intimately involved in the money-creation process. This involvement is criticized by some commentators who regard the creation of money as a strict government privilege that they feel should not be permitted of private firms. However, bank involvment in money creation is almost impossible to avoid. Moreover, the benefits of banks' role in money creation go largely to the public, not to the banks themselves.

Banks lend out other people's money. Bank customers who borrow the money pay interest for the privilege. The interest pays for the banks' expenses of carrying on business, interest to those who have placed their funds with the banks, and profits to the owners of the banks. Hence the bank intermediates between people who have spare resources and those who want to use those resources.

Banks (and credit unions and savings and loans) are "depository" institutions. In contrast to other financial intermediaries such as brokerage firms (which invest their customers' money such that the customer accepts the risk of loss), a depository institution accepts funds "on deposit," i.e., on the condition that the bank will return the principal to the depositors regardless of how well or badly the institution invests the funds. Hence, a depository institution absorbs much of the risk of loss in lending out its depositors' money.

Because banks are intermediaries, only a fraction of the money that people deposit with them is kept on hand. Most is lent out. ^The fact that banks keep on hand only a fraction of the funds deposited with them is no secret,^ and it is apparent to anyone who thinks about it: The lending out of money on deposit is how a bank is able to pay interest to its depositors for their funds. Otherwise, depositors would have to pay fees to the bank for safekeeping their money.

The practice of keeping only a fraction of deposits on hand has a cumulative effect for the banking system as a whole. Effectively, it permits the banking system to "create" money. If a given sum of cash is deposited in bank A, and half of it is lent out, whoever borrows it spends it, and the money becomes the deposit in bank B for someone else. Half of that sum is them lent out, spent and deposited. The process continues until the total amount of deposits is a multiple of the initial amoun t of cash. In this example, the cumulative total is ultimately twice the initial amount. In practice, the multiple depends on what fraction is kept on hand as reserves by the bank and what fraction is kept as "poket cash" outside the banking system.

Thus, "^fractional reserve banking" effectively permits the creation of money^ by the banking system to a multiple of the "base" money (typically created by the government). ^But while the system as a whole creates money, individual banks generally do not.^ Even though each bank may have in checking accounts a sum that is equal to the money that was deposited with it, as a group, total deposits in all banks are a multiple of the initial account.

This means, of course, that for a given supply of money in the economy, the existence of money generated by banks through fractiona reserve banking reduces the amount of money that the government creates. When governments create money, they profit by difference between the cost of printing it and its face value. Hence, fractional reserve banking reduces the potential income to the government from money creation(called "seignorage").

^Fractional reserve banking is a natural, common, and indeed unavoidable process.^ It is not an artifical construct of law or of central bank policy. Whenever and wherever bankers, goldsmiths and traders have accepted funds deposited with them, fractional reserve banking has emerged. It quickly becomes obvious to any businessman who accepts deposits that while some customers come to withdraw money, others come to deposit it. Only a fraction of the total deposits at a bank needs to be kept on hand for normal day-to-day banking. Even an unexpected shortfall one day at a bank can be remedied by briefly borrowing from another bank. The consequence is that a portion (usually the majority) of a country's money supply is generated by the banking system.


This process of lending out deposits can come in a number of forms. Banks in years past issued currency(bank notes). Now they mostly use checking accounts. Receipts for deposits have served the same role. Despite any laws that might be enacted to prevent fractional reserve banking, ^there is a strong incentive for the "banking" system to come up with something of its own that will serve as money because it is in virtually everyone's interest to do so.^ Depositors come out ahead because their deposits earn, rather than cost, money. Borrowers have access to funds at an interest rate they might not have otherwise obtained. Bankers make profits. Society is better able to channel idle resources into economically productive activity.

Fractional reserve banking in some form or other is virtually impossible to prevent. But this difficulty in preventing the creation of fraction reserves also helps ensure that institutions do not profit excessively from it. Although, in essence, fractional reserve banking confers money creation powers on the private banking sector, ^the loss to the government primary{primarily} goes to the benefit of the public^, not the banks. The potential profits from money creation through account expansion gives banks an incentive to expand their activities. This expansion can come only from attracting more deposits. The primary means of attracting deposits is by offering higher interest rates or more services. As a consquence, the banks tend to bid away the excess profits, and the benefits go to customers. Fractional reserve banking is therefore a means of reducing the public's sacrifice of interest earnings to the government. ^The public, not the banking system, is the ultimate beneficiary of fractional reserve banking.^

(... ...)

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