I’d like to know more about Fed — and how it is neither a federal agency, nor does it have any reserves.

BY busadmin  November 28, 2007 at 6:28 PM EST

Question/Comment: I’ve seen now several of your segments on the Federal Reserve and I encourage you, on your next segment, to go deeper.  There is much information available regarding the Fed and how it is neither a federal agency, nor does it have any reserves. Our entire economy, as I’m sure you’re aware, is a house of cards built upon the mechanism of the Fed generating money literally out of thin air (with no tangible backing), distributed out to the federal reserve banks, trickling all the way down to us folks.  Our fractional reserve banking laws allow our banks to lend out many times the amount of money they actually have in reserves.  There is so much that is truly fascinating about this story but I’ve never heard it discussed or mentioned in the mainstream media.  If you haven’t already read it, “The Creature from Jekyll Island” by G. Edward Griffin is a wonderful book (whether or not one agrees with the author’s political views).

Paul Solman: The “reserves” are what the banks keep with the Fed, not what the Fed stores somewhere else. On Jekyll Island, say.

Yes, the Fed creates money out of thin air, as you put it. And yes, the money tends to lose value over time, as more of it gets created than the values of goods and services multiplies. The problem is the ALTERNATIVE. As the Great Depression seemed to convincingly demonstrate, when the value of money SHRINKS, very bad things can happen to a moderately-free market economy like ours. It’s a little hard to see how our economy would grow if there was no fractional banking, and thus no supervised, intermediated credit.

So the Fed tries to steer its famous middle course between creating too much money and creating too little. And we haven’t had a Great Depression for 70-plus years, or a hyperinflation, for that matter. Not bad.