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By Kalinda Rose Stevenson 

One of the fundamental functions of government is to control the money supply.

The more you understand how governments control the amount of money in the economic system, in a global economy, the better you can take control of your own personal economic system.  

Every nation has its own central bank. One of the functions of a central bank is to respond to current economic situations to either cool down or heat up the economy.

In the United States, the central bank is the Federal Reserve.

I’ll refer specifically to the Fed here,  but the function is the same in other central banks.

You might hear that the Fed is “pumping money” into the economy to calm fears of an economic panic. 

At other times, you will hear that the Fed will “drain money” from the system, to cool it down.  These are two more examples of “plumbing language” applied to money.

Although the news media use such language, they don’t explain how the Fed increases or decreases the amount of money.

First, let’s be clear what it does NOT mean.

The Fed does not pump more money into the system by printing more currency. 
Money is not equivalent to currency.

These days, most money is electronic data moving from account to account.

One of the ways that the Fed controls the amount of money in the economy is  by changing the reserve requirements of banks.

The Federal Reserve requires banks to keep on reserve 3-10% of the deposits,  and allows the banks to loan the rest.

If the Fed changes the required reserve, it controls the amount of money banks can loan. 

For example, with a 3% reserve,  if you deposit $1000 into your account, the bank has to keep only $30 on reserve.  It can loan the remaining $970.

With a 10% reserve, the bank must keep $100 on reserve, and can loan the remaining $900. So the higher the reserve requirement,  the less money the bank can loan.
The lower the reserve requirement,  the more money the bank can loan.

So even though the media talk about the Fed pumping more money into the economy,
in fact, the banks are doing the money-pumping,  because the Fed has changed the amount of money banks can loan out. 

So, one way that the Federal Reserve  can “pump money into” or “drain money
out of” the system is by changing the reserve requirement.

I wrote this article as part of my FREE 52 Heart Of Money Insights series.  This e-course consists of 52 insights about the essence of money. You will receive one insight by email each week about some specific aspect of money. Each insight is designed to transform your relationship to money from “money limits” to “no money limits.”

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Find out how a real person went from desperation  to a life of freedom because of a simple, three-word formula.

The formula is so simple that you can start using it today to create your life of freedom. 

http://nomoneylimits.com/thefreedomequation
 
For Your Abundant Success,
Kalinda Rose Stevenson, Ph.D.
Author of No Money Limits For Real Estate Investors
kalinda@NoMoneyLimits.com
www.NoMoneyLimits.com

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This entry was posted on Wednesday, September 19th, 2007 at 3:32 pm and is filed under Abundantly Alive, Money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.