Money supply in the United States, and indeed any other economy using a central banking reserve system, is controlled and managed by a limited number of private banks working together for their own benefit instead of the benefit of the nation. As Thomas Jefferson, the third President of the United States allegedly once said, “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs (Quotations Page).
Money supply in the United Stated is expanded in line with a fractional reserve policy. This policy whereby the banks retain a fraction of their total deposits, and are then able to lend the rest means there will always be a constantly expanding money supply, and this will always be a multiple larger than the actual amount of base money that is made by the Federal Reserve. This multiple is known as the money multiplier and is calculated by the Federal Reserve based around its reserve requirement and other fiscal regulations.
The importance of financial intermediation cannot be understated, as this is required in order to manage the banking and monetary system and to try and avoid banking panics, to serve as the central bank for the government, and to manage the nations’ supply of money through economic policies which try to maximize employment, minimize taxation, and produce positive gross domestic product.
The significance of banker’s taste for excess reserves on the Fed’s ability to expand the money supply shows that the fractional reserve system is not perfect and that to gain maximum control over the money multiplier and the supply of money, reserves are needed to manipulate fiscal information to the banker’s benefit. These assets are counted as reserves due to the fact that they are not necessary for the bank to hold these reserves as collateral against its lending, hence they are considered excess. The banks could use these reserves to aggressively increase loans or investments if they so wish. This is a key factor to consider here, that the banker’s taste limit the power of the Fed, as they may be able to undermine the central banking system of the United States by manipulating the money supply.
Quotations Page. 13 May 2010 <http://www.quotationspage.com/quote/37700.html>.
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