It is stunning how many people talk about [money](https://inleo.io/@leoglossary/leoglossary-money) yet have no clue about monetary [history](https://inleo.io/@leoglossary/leoglossary-history).  They do not even understand the most basic concepts about money, banking, and [The Fed](https://inleo.io/@leoglossary/leoglossary-federal-reserve-bank-the-fed).


One area where there is a lot of confusion is with [central bank reserves](https://inleo.io/@leoglossary/leoglossary-central-bank-reserves).  This is evident by the [statement](https://inleo.io/@leoglossary/leoglossary-statement) "the printing press go brr".  Anyone who says this obviously has no clue about how the system operates.


Being within the realm of [cryptocurrency](https://inleo.io/@leoglossary/cryptocurrency), if we are going to replace the existing financial system, it is best to understand how it actually works.


For this reason we will start with the most basic of concepts.


https://www.investopedia.com/thmb/momcCOOxxsSkZf1HbuM-Kq5d1Rg=/1500x1002/filters:fill(auto,1)/GettyImages-699686820-a630c3fcc96441e1ab8a0d2441731efb.jpg
<center> [Source](https://www.investopedia.com/articles/investing/061515/what-do-federal-reserve-banks-do.asp) </center>


# The Fed Doesn't Print Money


Have you heard the [story](https://inleo.io/@leoglossary/leoglossary-story) about [JP Morgan](https://inleo.io/@leoglossary/leoglossary-jp-morgan-chase-and-co) (the [man](https://inleo.io/@leoglossary/leoglossary-man) not the bank) saving the United States [economy](https://inleo.io/@leoglossary/leoglossary-economy) by bailing out the US government?


That is partially true.  


In 1907, when panic struck the banking system.  JP Morgan and other [bankers](https://inleo.io/@leoglossary/leoglossary-banker) got together to put up $25 million, a huge sum at the time, to back stop the banking system.  But that was only one piece of the puzzle.  


The U.S Treasury came up with $36 million that was deposited in [New York City](https://inleo.io/@leoglossary/leoglossary-new-york-city) [banks](https://inleo.io/@leoglossary/leoglossary-bank).  This outpaces what Morgan and his [investors](https://inleo.io/@leoglossary/leoglossary-investor) came up with.


Again, this is only a part of the story.


The other piece is the [clearing house](https://inleo.io/@leoglossary/leoglossary-clearing-house) associations spread throughout the country.  They came up with $256 million.  But this was not [cash](https://inleo.io/@leoglossary/leoglossary-cash) or even [gold](https://inleo.io/@leoglossary/leoglossary-gold).  Instead, they put forth clearing house [loan](https://inleo.io/@leoglossary/leoglossary-loans) certificates.   These are inter-bank quasi money that allows banks to clear [liabilities](https://inleo.io/@leoglossary/leoglossary-liability) with other institutions within the system. 


Essentially it is inter-bank [credit](https://inleo.io/@leoglossary/leoglossary-credit) and a vault substitute.


Notice how this is not cash, dollars, or [specie](https://inleo.io/@leoglossary/leoglossary-specie) of any kind.  It is basically a [bank](https://inleo.io/@leoglossary/leoglossary-bank) [token](https://inleo.io/@leoglossary/leoglossary-token) that was created by the clearinghouses.


We also have to mention this is before the creation of the Federal Reserve.  Hence, when that was being developed, what do you think they did?  The idea of being able to create an inter-bank credit to allow for the clearing of liabilities made sense.  Therefore, it was incorporated.


Of course, nobody would mistake a clearing house loan certificate for US dollars.  Why do they do it with [central bank](https://inleo.io/@leoglossary/leoglossary-central-bank) reserves?


Here is where the Fed's propaganda enters.


## Cashless System Post-[World War II](https://inleo.io/@leoglossary/leoglossary-world-war-2)


We hear a lot about the "war on cash".


The reality is the banking system got rid of cash a long time ago.  Since the 1940s, [settlements](https://inleo.io/@leoglossary/leoglossary-settlement-financial) among the banks were done using a [ledger](https://inleo.io/@leoglossary/leoglossary-ledger) based system, something akin to [checks](https://inleo.io/@leoglossary/leoglossary-check-cheque).  Nobody was sending bags of money back and forth.


There is also another factor in this that is very revealing.


For decades, [bank reserves](https://inleo.io/@leoglossary/leoglossary-bank-reserves) with the central bank were non-existent.  The Fed believed it could control things by making the reserve more (or less) expensive.  Unfortunately for it, having a currency meant to replace cash when the banking system basically got rid of cash is useless.  This is what the Fed found out.


Also, we hear a lot about [reserve requirements](https://inleo.io/@leoglossary/leoglossary-reserve-requirement).  However, the banks get around whatever the Fed says be either turning to different products, such as non-bank [money market fund](https://inleo.io/@leoglossary/leoglossary-money-market-fund) which isnt subject to reserve requirements or simply enter the [Eurodollar](https://inleo.io/@leoglossary/leoglossary-eurodollar) [market](https://inleo.io/@leoglossary/leoglossary-market) to get a better rate than the Fed is offering.


Once again, it becomes very clear.  The Fed doesn't print money.  In fact, the only tool in its bag is to target the [fed funds rate](https://inleo.io/@leoglossary/leoglossary-fed-funds-rate).  That is the only move it truly has.  It can change that and hope things work out.


Do you see why I repeatedly say the Fed is mostly a propaganda organization?


The reality is, when it comes to [liquidity](https://inleo.io/@leoglossary/leoglossary-liquidity), the commercial banking system is in full control of that and the Fed wasn't invited.  This is why we see a dollar shortage in spite of trillions in central bank [reserves](https://inleo.io/@leoglossary/leoglossary-reserves) being printed.  


These are not dollars.  Reserves are not [legal tender](https://inleo.io/@leoglossary/leoglossary-legal-tender) and cannot be held by private non-bank [businesses](https://inleo.io/@leoglossary/leoglossary-business) or individuals.  Remember, like a clearing house loan certificate, a reserve is nothing more than inter-bank credit.  How can anyone consider that to be broad economy money?


The answer is that, if one knows how things operate, it is an impossible conclusion.


___


<center>[What Is Hive](https://inleo.io/@leoglossary/leoglossary-what-is-hive) </center>



Posted Using [InLeo Alpha](https://inleo.io/@taskmaster4450le/the-fed-doesnt-print-money-what-are-reservces)