Don't Blame (or Credit) the Fed

A common question in our consumer culture is, "Where did the money go?" Less commonly asked, perhaps because it occurs on a macroeconomic stage, is, "From whence did this money come?"

If a Columnist Conversation from last Friday is any indication, and if we can view RealMoney contributors as a microcosm of the market, there is some intelligently designed confusion on the matter.

Too many of us believe the Federal Reserve creates money through its open market operations, the buying and selling of Treasury securities. This is certainly a contributory factor, but it is only part of the story.

The Federal Reserve's open market operations affect the level of free reserves in the banking system. It is the lending of these free reserves throughout the banking system that expands the supply of credit. ...