National Geographic : 1993 Jan
houses, or sells some-usually U. S. Treasury bills, which in effect are government promissory notes. Say today the Fed buys a hundred mil lion dollars in Treasury bills from those big securities dealers, who keep a stock of them to trade with the public. When the Fed pays the dealers, a hundred million dollars will thereby be added to the coun try's money supply, because the dealers will be credited that amount by their banks, which now have that much more on deposit. But where did the Fed get that hundred million dollars? "We created it," a Fed official tells me. He means that anytime the central bank writes a check, so to speak, it creates money. "It's money that didn't exist before," he says. Is there any limit on that? "No limit. Only the good judgment and the conscience of the responsible Federal Reserve people." And where did they get this vast authority? "It was delegated to them in the Federal Reserve Act of 1913, based on the Constitution, Article I, Section 8. 'Congress shall have the power ... to coin money, regulate the value thereof. .. .' " Now watch how that Fed-created money lets our commercial bank ing system create even more. The Fed requires banks to put aside a portion of their depositors' funds as reserves. Say this reserve ratio is set at 10 percent-then for every $1,000 in new deposits, a bank must keep at least $100 in reserve but can loan out the rest, namely $900. On the bank's books this loan remains as an asset, earning interest until it is paid off. The customer who got the loan is likely to spend it right away, say for a used car. The car dealer deposits the $900 check in his bank, which then has an additional $900 in reserves and can in turn loan out 90 percent of that-$810. And so on and on, until the original $1,000 put into one bank may enable dozens of banks to issue a total of $9,000 in new loans. Thus a hundred million dollars injected by the Fed into the com mercial banking system could theoretically stimulate the appearance The avid pursuitof money fuels feverish activity on thefloor of the New York Stock Exchange (NYSE). Fourto six billion dollars' worth ofsecurities are bought and sold each day, the deals struck by stock specialists and brokers at stalls tentacled with com puter screens. More than 2,000 corporations are listed on the NYSE. The sale of their shares raises capital and spreads ownership. Money doesn't change hands, it changes screens in the world of investor RalphBothne. Specially designed software and satellite linkups to the lat est market data enable him to trade currencies from his Californiahome.