Who creates money in the United States? The Federal Reserve & Banks! 🏦
The Federal Reserve, the central bank of the United States, established in 1913, can create money out of thin air. 💸
The central bank creates money out of thin air while non-central banks create money through fractional reserve banking.
Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal.
Banks are allowed to create money for loans in which they must keep a determined % (Reserve Requirement) for liquidity sakes.
The Federal Reserve can create money and lend 10M to a bank.
With a 10% reserve requirement, that bank now lends up to 9M.
The borrowers of the 9M will ultimately deposit it back in the bank.
The money multiplier effect allows banks to use the 10M as reserves and can now lend up to 100M.
On March 15th, 2020, the Fed reduces the reserve requirement to 0%.
Currently, banks can literally create unlimited money by loans with no reserves. 😲
The Federal Reserve through bank reserves and requirements controls the money creation of banks.
Source: Modern Money Mechanics, published in 1994, by the Federal Reserve of Chicago