That is the the way central banks have always worked.

Reader comment on: How To Spend $1.25 Trillion

Submitted by Lyle (United States), Aug 26, 2010 22:33

The very definition of a central bank is one that creates money. Indeed all banks do this if you have fractional reserve banking, (since the Glorious Revolution in the UK). Say you put some currency in the bank, then the bank can lend out 80% of the amount to someone else and so on. A central bank however is always solvent by definition, it can't go broke, because its ability to create money is unlimited.

So in one sense all banking is nothing but a big con game if you have fractional reserve banking, you depend on the bank having your money when you need it because the law of large numbers says that most of the time there won't be a surplus of withdrawals. (That's called a run and happened to the money market funds in 2008)

To even be more cynical all money is a con game, you and I agree to use it to transact business due to confidence. Recall during the most apocolyptic predictions of y2k there were discussions of currency descending to its intrinsic value. (i.e. zero).

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