:) lol...I think you are missing the intent of my question (again). I know why money is created...why it exists (it's nothing more than an agreed upon medium of exchange).

I want to know why MORE money needs to be created through the existing process of the Fed and what, precisely, justifies MORE money injected into the system if it's not as DrOct says "being created for the sole purpose of funding the governments overspending".

I have to admit, that seems like a strange question to me. The majority of the economy, and the majority of transactions have nothing whatsoever to do with the government. Why would you think that government spending would be the only reason money might need to be created?

It is created to allow the economy to grow. It would be created anyway, even without a Federal Reserve or Central Bank of any kind, simply by virtue of fractional reserve banking. But with a central banking system, you have someone at least trying to control that growth some. The Federal Reserve doesn't have total control over the creation, or non-creation of money, but it does have tools with which to manipulate it.
Personally I prefer this system, to one without a central bank, or to one in which there are no banks (or banks have to keep 100% reserves, and therefore people actually have to pay for the privilege of keeping their money there), in which the money supply is controlled entirely by a few politicians or bureaucrats. As it stands, the market has a large say in determining how much money it needs for it's activities, but we have a group at least attempting to "mind the ship" and keep things under control. How good a job they've done of that... that's another debate entirely.

There are certainly other structures and ideas for how a central bank could be set up, maybe some of them would be better, or maybe we really would be better off without a central bank of any kind. I'm just trying to make clear how the system actually works, and why it doesn't inherently have to lead to ruin and "slavery."

It certainly has it's pitfalls and disadvantages, and I'm not necessarily trying to argue that there aren't other possible systems, or that others might not actually work better (though honestly every possible monetary system has it's own advantages and disadvantages, so it's really just a matter of what you're willing to risk/give up, and what you think you'll gain. Also since all of them would be administered by humans, any of them COULD be royally screwed up). I'm just saying that there is a logic to the current system, and it doesn't by necessity lead to ruin and destruction.

"The Federal Reserve doesn't have total control over the creation, or non-creation of money, but it does have tools with which to manipulate it."

Then who does? If the Fed doesn't and the Government doesn't via overspending, who or what sets in motion the actions needed to inject money into the system?

Let's look at it this way, using your earlier example of a society in which there are exactly $100. Let's assume it stays that way, and no new money is created (by a government or by the "greedy lazy man" that was in the previous example).

As the economy grows, people have to keep using the same $100. These $100 are the only medium of exchange available, so they represent all of the value of the economy. As people create businesses and build houses, the value of each dollar increases, becuase it has to represent more and more things. Eventually, you might reach the point at which someone could buy a house for $1, because their scarcity has made them more and more valuable. At that point, how do you go about transacting business on a day to day basis? You can't go buy groceries because even a penny would be worth so much that you wouldn't exchange it for just a cartload of groceries, when it could buy a whole truckload. How could anyone make change? It would be come very difficult to start a business or do much of anything, becuase it would be come very difficult to actually get a hold of money to do that with. You would have a currency so valuable it would essentially be useless. You wouldn't have enough of it going around to make the necessary number of transactions.

Ultimately as a result, the economy would have to shrink, and prices would have to go down, until you were back to where you started. An economy needs new money injected into the system as it grows, in order to keep the actual value of the dollar steady. Too much of it and you have inflation, too little and you have deflation, neither of which are generally good (though in certain circumstances, either can probably be ok, in small amounts).

k, I found this which I think satisfies my question...

How do loans "create" money?

When banks loan money, that money is spent on goods or services. These goods or services create income for the people providing them, which they in turn spend on other good and services. When lots of loans are made, even more spending is done and more money is pumping through the economy.

When the Fed sees that too much money is going through the economy and prices are rising too quickly (inflation), they put the brakes on by selling securities. This reduces the amount of reserves available to banks, causing interest rates to rise, and banks will not make as many loans because it costs more for consumers to borrow. Ultimately, the economy slows down and inflation slows down with it.

When someone takes out a loan, they are creating money. This is how fractional reserve banking works, and it's been going on for many many centuries.

Ok, you posted that as I was responding. That's an even better explanation.

And by even better explanation, I mean clearer and more detailed than my simple two sentence explanation.

I suppose what I was asking was, how does the Fed NOT control money creation or reduction? It seems to me that they do...in a somewhat indirect way via their relationship with Reserve banks.

Ah, ok. Well, I just mean that banks are the ones actually making the loans. The Fed can certainly regulate that, and put restrictions on how much they can loan, but ultimately it's up to the banks and the economy to actually create the money. So they have a lot of influence, but not direct control.

If the economy is generating lots of deposits for the banks, and they can therefore keep making loans, the Fed can only do so much to put the breaks on that (but if that were happening, despite the Fed's efforts, it would probably indicate healthy growth anyway).

I mean look at right now. The Fed has been working hard to reduce interest rates, and make the economy more liquid, but banks are still afraid to lend, so things are still moving pretty slowly. The Federal Reserve can only do so much. I actually think this is a good thing, since I'd prefer for the market and private sector to have most of the control over the economy, than to have a small group holding all of the strings.

Clarification. I'm not saying I think it's a good thing that the economy has slowed so much and that banks are so afraid to lend. Just that it's a good thing that the Federal Reserve doesn't control everything.

How many posts can I take to answer one question?! Apparently at least 3!

I agree with that last statement. My purpose for posting here was to ultimately show how that was false though. But obviously, I am over my head here.

Part of my concern lies in the multitude of quotes from various politicians, economists and bankers that are openly and vehemently against the Fed and for its abolishment.

It doesn't prove anything, but I am curious as to what it is exactly about the Fed that they so strongly disapprove of. It's apparent, however, that I lack the knowledge to effectively debate this particular side in any detail. And any generalizations I've tried to make has been met with rebuke. :(

I'm just trying to get to the bottom of these concerns.

DrOct, you've been extremely helpful...so thanks again! Withnail, despite you being a complete dick (and I mean that in the nicest way), thank you too. :)

"How many posts can I take to answer one question?! Apparently at least 3!"

I got you beat by about 190! =D

Haha! I suppose you do have me beat!

I think we're all at least somewhat in over our heads here.

When it comes to the quotes and such of people so vehemently opposed, I've thought about the same thing as I've been learning. I think some of them are honestly just from people who don't actually understand the Federal Reserve and what it does, or how it works. Some are from people who are against the idea of Fractional Reserve banking (I think generally these people also don't quite understand how things really work). Others I think, when you look more closely at their statements, are actually just against the idea of a semi-private central bank being put in charge of monetary policy, or are simply critical of the structure of the Federal Reserve. I think most people who actually understand how it all works and are against it, have reasonable complaints and criticisms. But the system is complex, so it's easy to think the system works differently than it does, and I think that's what leads to some of the more outrageous criticisms, conspiracy theories, and such. And as we've all found, it's difficult to find good information on how the whole system actually works, especially explained and presented in a straightforward enough manner for the layman to get the basic structure.

"I suppose what I was asking was, how does the Fed NOT control money creation or reduction?"

I think I posted some sort of response earlier when I copy-pasted this:

"The Fed controls the size of the money supply.

A bank in the U.S. must hold reserves of base money in proportion to the amount of its demand deposit liabilities. However the amount a bank may lend is limited by its own capital, not its reserves. In order to maintain control of the Fed funds rate, i.e. interbank lending rate, the Fed must provide whatever reserves are required by the banking system as a whole. In fact if the Fed withheld reserves, it could imperil the liquidity of one or more banks. Thus for all practical purposes, the Fed cannot even control the amount of base money it issues."

Money creation is determined by the demand for money which is indicated by the demand for bank loans. If interest rates are too low than there would be too many loans and inflation would result. Raising interest rates decrease the amount of loans, but they can't afford to raise them too high else they restrict economic growth. The Fed is responsible for influencing these interest rates, though it's mostly decided by market pressures.

Unless there are any other questions or concerns... It sounds like most everyone is more or less done here... I have to admit I'm kind of sorry to see the thread go. It's been a lot of fun discussing and researching all of this.

I'm good with letting this thread die, yes. And thanks Chris! I was so busy engaged with DrOct, your post was overlooked.

I may save this thread, as it's got a lot of interesting information in it.

And just so it all ends on the highest note possible I'll once again leave everyone with the recipe a relevant drink which my friend and I made up a few weeks back.

The Ron Paul Gold Standard:

One part Green Creme de Menth (Money)
One part Goldschlager (backing the Money)
Add club soda to taste (I can assure you it'll be too sweet without the soda).

Variations:

"Gold Standard, hold the Fiat Currency"
As above, minus the creme de menth.

"Fiat Currency"
As above, minus Goldschlager

I'm sure you can come up with some other clever variations by adding other ingredients.

Well, I'm glad my post managed to stimulate good discussion. I have to say that there were some bumps, but it's generally been some of the best discussion this forum has seen, and I think that says a lot.

I've learned a lot from this, which is exactly what I hoped to do by starting it.

It would be nice if someone would post a condensed post that outlined briefly the conclusion we came to about the issue. I might save this.