How Banks Work: The bank is an inherently flawed institution that gains money by parading promises of money as money itself. This does one of two things. If the consumer recoginizes the promises as money itself, the bank as counterfetted and expanded the money supply creating an inflation tax on the non-counterfetters. If the consumer wisens up and wants the money, this creates a bank run, where the last depositers to withdraw are out of luck.
History of Banks: This practice first became popular with gold. Gold carriers found lugging around the gold to be unwieldy so they placed it in care of gold smiths that would give them claim slips on that gold. The claim slip was as good as gold, for at any momement the claim slip holder could go to the bank and get the gold. Clever goldsmith's (aka bankers), got clever and noticed that not everybody demanded gold at once. They then issued more claim slips through loans than they claimed to have and the game was afoot. Claim slips became promise slips.
What bank reserves mean: The banker has a dillema on his hands... If he issues a lot of claims of little gold like 100 claim slips on only 5 units of gold he risk a bank run. On the flip side he could risk not risking enough, like 100 claim slips on 99 gold, and he could lose out on interest profits. The percentage reserves is the immediate amount of claim slips that could be meant if everybody demanded their gold (or pesos, Euro's, dollars, whatever), at once as opposed to their crummy bank deposit. Now in real lift it is a tad more complex than that... The banks are interconnected somewhat where they can quick borrow money from other banks or the central bank to meet a bank run. They can also factor (sell future promises of money) to other investors to meat liquidity needs. This means that when the banks fail, they will all fail together and fall hard.
History of the dollar: At one time the US also got into the claim slip as promise slip game, and would accept gold and give claim slips. The government got greedy and issued lots of claims on little gold such that the promise on the bill that it was redeemable was a joke, if a decent percentage of the populace wanted their gold back as opposed to their claim slip on the gold. The government gave up and said that the dollar itself would have value as opposed to being a claim slip (albeit fractional one) on something that did have value. The dollar can no longer be used to exchange for gold at the Fed, but can be used only to buy a federal reserve account which exist only on paper.
How the Federal Reserve operates:The dollar can exist in one of two states. It can exist as a deposit (paper entry) at the Federal Reserve Banks (I think only banks can have deposits there), or the Federal Reserve can part ways with dollar by printing it at the beurea of engraving and printing and loaning out promise slips (dollar bills) on this virtual wealth. This is why the government could expand the money supply by three times and not print a single dollar, or the beuror of engraving and printing could print an additional 50 million dollars and this could reflect a change of for rather than an expansion in the money supply. If I have a 1000 dollar deposit at the fed, I can ring up the fed (only if I'm a bank (I think)), and he will kill my 1000 dollar account and instead give me paper dollars. I can also go the fed and deposit a 1000 dollars where they will figutavily shread my paper money and give me a 1000 dollar deposit at the central bank. A lot of dollars exist soley as accounting entrys at the federal reserve.
How the Fed expands the money supply: If the Fed desires to expand the money supply what they will do is to give themselves out of thin air that money. Say a half million dollars. They then have to decide how to spend it... Usually they go on a buying spree of debt investments for some strange reason. The counterfetted money leaves the Fed to the seller of goods and they have a bunch of (usually government) fixed income securities. The securities generate income that pays the hefty Federal budget fees and the remainder of profits on investments are supposedly turned over to the treasury department to be figured into the annual federal budget as miscelanous revenues. There exist a lot of critism on the fed, as to whether it should turn over its counterfetted money immediatly to the annual budget as opposed to buying investments and giving the remainder of investing profits to the government. Critics raise the concern that there exist the possibility for misuse of the counterfetted money and accuse the Fed of only using internal audits as opposed to external audits. On the rare occasion the fed wants decrease the money supply, they will sell away their bonds, and figutivly shread the dollar proceeds.
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