Wikipedia:Reference desk/Archives/Miscellaneous/2024 June 11

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June 11

Monetary policy, attempt #2

OK, now that I've clarified where this question is coming from, here it is again: if the Federal Reserve was abolished, what effect would it have on the money supply? My educated guess as a non-expert is that it would greatly decrease the money supply -- is that correct? 2601:646:8082:BA0:E19D:4C11:C950:1DA8 (talk) 03:44, 11 June 2024 (UTC)

Money is not created by the Federal Reserve, which is a system, but by banks providing credit to customers. I assume that "abolishing the Federal Reserve" also removes the banking regulation and supervision assigned by law to the Federal Reserve, and thereby the capital requirement that is meant to ensure that banks do not overextend the credits granted and remain solvent, that is, can honour their obligations to depositors. As the brakes are removed, the immediate effect is most likely a huge influx of newly created, easy money. The FDIC will be unable to keep providing deposit insurance, which depends on the assumption that the banks are regulated. Some banks will fail spectacularly and take others with them, and as depositors see their deposits are not safe they will want to see cash – bank runs will ensue. As banks go serially belly up and the economy contracts to a depression that becomes world-wide, the money that was abundantly available will dry up.  --Lambiam 05:50, 11 June 2024 (UTC)

The abolition of the Fed would only arise under extreme political circumstances that cannot be ignored in favor of a purely economic answer, except in some fantasy world. In that world, the author would decide what would make a good story. In the real world, the most likely outcome would be a combination of hoarding and skyrocketing inflation, arising from a comprehensive loss of faith in both institutions and the currency. DOR (ex-HK) (talk) 17:08, 11 June 2024 (UTC)

There are people who actually advocate the idea. Which is better, to ignore them, because they live in a fantasy world, or explain why this is maybe not the best idea, as long as the economy is still based on money?  --Lambiam 19:22, 11 June 2024 (UTC)

Sorry for the late reply (I was busy with other political stuff which mainly had to do with defending Israel and denouncing Hamas sympathizers as the terrorists they are) -- yes, I'm asking this question because me and my followers want to formulate an argument against abolishing the Fed and in favor of keeping it, but we want to make an argument based on national security considerations rather than purely economic ones! (And for how the money supply affects national security, see Balance of trade and Autarky, first and foremost!) 2601:646:8082:BA0:180E:97CC:ADFB:D01C (talk) 08:45, 16 June 2024 (UTC)