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FBI Cover Letter 

Modern Money Machanics  

The purpose of this Federal Reserve Bank booklet is to describe the basic process of money creation in a "fractional reserve" banking system.  The approach taken illustrates the changes in bank balance sheets that occur when deposits in banks change as a result of monetary action by the Federal Reserve System - the central bank of the United States.

I Bet You Thought 

Most of us acquire two types of knowledge - "school knowledge" and "folk knowledge."  Folk knowledge is information and "wisdom" passed from generation to generation or acquired on the streets.

For example, we're often told that sitting in a draft will give us a cold.  Science tells us the common cold results from a virus.  Yet, still we change our seat to avoid a draft.  We may acknowledge that drafts only contribute to lowering our resistance to infection, but we still blame the breeze rather than the bug.

So too, most of us hold certain economic misconceptions - folk knowledge containing a germ of truth and a plague of misconception, economic myths picked up by misreading or the acceptance of "facts" from a friend or relative.  Few of us are immune to economic myths or misconceptions.  If you don’t think so.  I bet you thought ...