As long as there is confidence in it, it works!
when National Banks loan dollars to Treasury or anybody they create the dollars out of nothing.National Banks are chartered by The Federal government to issue new dollars when they lend. The loan to Treasury is done by Treasury selling securities/bonds which are effectively IOUs of the Treasury to holders of the bonds. A correspondent bank may settle the puchase by exchanging central bank dollars for bank’s commercial bank dollars. These reserve dollars will then be deposited in the Treasury’s general sccount at the Fed . The Treasury will then draw reserve dollars from the Treasury’s account at the fed and deposit them in the reserves of the bank where the intended recipient has a checking account. Before depositing these dollars in in the recipient’s checking account the recipient’s bank will first seek a correspondent bankto exchange the reserve dollars back to commercial bank dollars which will then be put in the recipient’s checking account to be spent into circulation as ordered by. the Congress. Federal Reserves does not create the new dollars that will go into circulation. The commercial banks do. But the Federal Government’s sovereignty is still served by the National Banks creating dollars when they lend.
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