# conomist buffs, how is new currency **URL:** \ **Category:** Factual Questions\ **Created:** [December 22, 2011, 1:51am UTC](https://boards.straightdope.com/t/conomist-buffs-how-is-new-currency/607028 "2011-12-22T01:51:49Z")\ **Posts on this page:** 7\ **Page:** 2
**Author:** ![Alley\_Dweller](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/alley_dweller/32/430_2.png) [@Alley\_Dweller](https://boards.straightdope.com/u/Alley_Dweller)\ **Post date:** [December 23, 2011, 2:41am UTC](https://boards.straightdope.com/t/conomist-buffs-how-is-new-currency/607028/21 "2011-12-23T02:41:46Z")
> [@swaneycpcc](#): > > Alley Dweller (and Newme): Okay, this business about the Fed buying stuff up and creating money in reserve accounts out of thin air (in sense) is what I was looking for. I get everything up until the last 3 paragraphs 100% (I think), and the last 3 paragraphs are what I was looking for–I’ll have to think about it a bit to make sure I understand it. Thanks for your replies. > > It still seems like either the fed is just handing out free money to bank C, or that C really isn’t gaining anything because it lost $100 in treasury notes that it bought (maybe not for $100, but still… it would’ve been worth $100 eventually). Which is true? If it’s the first, that seems odd, and if it’s the second then it seems like treasuries/bonds are an integral part of this system of creating new money, and I’d have to think more about how that all might fit together. No, no. The Fed is not handing out free money to Bank C. That is what a lot of those Zionist conspiracy videos you see on youtube get wrong. Bank C has to give up its valuable Treasury note to the Fed in exchange for the $100. It’s just that Bank C, at that particular moment in time, decided it would rather have $100 in its account than to keep holding on to the Treasury note. Maybe a big CD is coming due the next day. Maybe they found an investment that pays a better return. The reason is not important. They would rather have $100 than the Treasury note and the Fed is willing to give them $100 for it. Everybody’s happy. Treasury notes get sold everyday by banks, securities dealers, investors; there’s a thriving market. If Bank C no longer wants its note, it can put it up for sale. If another bank happens to buy the note, then the other bank transfers $100 from its reserve account to Bank C’s reserve account. The net amount of money in reserve accounts remains constant, it just got shuffled around a bit. But if the Fed happens to buy the note, it has the advantage that it maintains the reserve accounts. It simply electronically adds $100 to the balance in Bank C’s reserve account without taking it out of anybody else’s account. Suddenly the total balance in all reserve accounts grows by $100. > [@](#): > > If bank C does choose to take the “free” $100 and get a $100 bill, then where does that bill come from? Of course the Fed can give C a $100 bill they got in deposits from other banks, but eventually that would get the Fed in holding reserve accounts of a much bigger value than the cash deposits they have. Do they sometimes print a $100 bill to send C? The amount that the Fed holds in reserve accounts _is_ much bigger than the sum total of all cash deposits that they have ever received. When they buy up these Treasury notes, they don’t have to have any greenbacks, coins, gold, silver, or anything else on hand. They just change the number on an electronic account ledger. That’s it. The money comes out of nowhere. If for some reason Bank C would rather have a $100 bill, they’ll subtract $100 from Bank C’s balance and then go look and see if they happen to have one laying around. If they don’t, they’ll call up the [Bureau of Engraving and Printing](http://www.moneyfactory.gov/) and ask them to print one up for them. ---
**Author:** ![Exapno\_Mapcase](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/exapno_mapcase/32/1051_2.png) [@Exapno\_Mapcase](https://boards.straightdope.com/u/Exapno_Mapcase)\ **Post date:** [December 23, 2011, 4:38am UTC](https://boards.straightdope.com/t/conomist-buffs-how-is-new-currency/607028/22 "2011-12-23T04:38:42Z")
> [@swaneycpcc](#): > > it seems like treasuries/bonds are an integral part of this system of creating new money, and I’d have to think more about how that all might fit together. This is absolutely true. You have to stop thinking of currency as the only money. Currency is nothing more than a convenient way of creating IOUs that everybody will accept. It has very little to do with money as we know it today. Even under the gold standard, the government issued money based on nothing more than the agreed value of the government’s holdings in gold. Gold wasn’t actually money: it was just a convenient exchange medium that people agreed upon. Eventually people realized that something physical like gold wasn’t needed. Money could be issued based on the agreed value of the government and the economy that sustained it. It can literally be manufactured from nothing but a shared opinion. Although this sounded dangerous at one time (still does to some people) there are built in safeguards. If people lower that agreed value, then you’re Greece or Italy. But both still issue bonds. It’s just that Greece has to promise people more of a future return for them. Bonds are money without being currency. They aren’t even physical any longer. Heck, U. S. savings bonds will stop being physical next year. Physically matters not a whit. ---
**Author:** ![Leo\_Bloom](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/leo_bloom/32/10377_2.png) [@Leo\_Bloom](https://boards.straightdope.com/u/Leo_Bloom)\ **Post date:** [December 23, 2011, 4:56am UTC](https://boards.straightdope.com/t/conomist-buffs-how-is-new-currency/607028/23 "2011-12-23T04:56:53Z")
> [@Alley\_Dweller](#): > > …The Fed is not handing out free money to Bank C. That is what a lot of those Zionist conspiracy videos you see on youtube get wrong… :smack: And all the time I’ve wasted now. I guess I’ll have to start watching more scholarly Zionist conspiracy videos. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [December 23, 2011, 5:28pm UTC](https://boards.straightdope.com/t/conomist-buffs-how-is-new-currency/607028/24 "2011-12-23T17:28:06Z")
The simplest way to understand is to think of Traveler’s Checks. When Bank of America wants more Traveler’s Checks for its customers it just prints them. It then exchanges them for customer’s money, typically debiting the customer’s checking account. Those checks are IOU’s on the Bank of America. Fed Res banknotes are just like the Checks of a private bank (although of course they have a special legal status). They are IOU’s on the Fed Res, though can be redeemed only for other such banknotes. :smack: In a “big picture” sense, money in the form of Fed Res banknotes isn’t strongly different than bank deposits existing on Fed Res computers; whether the former needs to increase or decrease is a matter of whether ordinary people have preference for cash or check. ---
**Author:** ![md2000](https://avatars.discourse-cdn.com/v4/letter/m/73ab20/32.png) [@md2000](https://boards.straightdope.com/u/md2000)\ **Post date:** [December 23, 2011, 8:55pm UTC](https://boards.straightdope.com/t/conomist-buffs-how-is-new-currency/607028/25 "2011-12-23T20:55:25Z")
1. Cash is just bought from the mint by banks usng their electrons. 2. The government decides to create more money by making loans to various banks. Banks themselves create money by loaning out more than they have on deposit. The Fed decides how much it will loan and how much that loan will cost to open the floodgates or reign in the banks - depending on whether their statistics say the money supply needs to expand or not. The idea is to keep the money supply (including electrons, mortgages, IOU’s, and Travellers’ Cheques) within a narrow band where money is not too expensive to borrow and not so much that people spend it like water. If everyone wants to borrow money but the banks are tapped out, already have loaned to their limit have no more reserve, then the law of supply and demand says interest rates will go up; if nobody is borrowing, the banks will loan any spare cash for whatever they can get, as long as the interest is above 0%. In times like today, the way to get the economy moving is low interest - the Fed does what it can to make sure the banks have a lot of money to lend. ---
**Author:** ![Alley\_Dweller](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/alley_dweller/32/430_2.png) [@Alley\_Dweller](https://boards.straightdope.com/u/Alley_Dweller)\ **Post date:** [December 23, 2011, 11:23pm UTC](https://boards.straightdope.com/t/conomist-buffs-how-is-new-currency/607028/26 "2011-12-23T23:23:37Z")
> [@md2000](#): > > 1. Cash is just bought from the mint by banks usng their electrons. The United States Mint has nothing to do with paper currency. The Mint’s only function is to produce coins (the metal ones). The Mint sells coins to the Federal Reserve Banks, private banks, armored car companies, and even directly to the general public. Paper currency in the United States is manufactured by the Bureau of Engraving and Printing. The Federal Reserve issues paper currency to the banks. One large difference between the two is that the Mint requires payment for the full face value (plus postage and handling) for all coins that it sells. Even though it might cost only 15 cents to mint a dollar coin (I don’t know if this figure is accurate), the Mint sells it for $1, even to the Federal Reserve. The BEP, however, functions only as a printing press. It sells Federal Reserve Notes (paper US currency) to the Federal Reserve for the cost of printing. Both prefer payment in electronic money. ---
**Author:** ![swaneycpcc](https://avatars.discourse-cdn.com/v4/letter/s/e9c0ed/32.png) [@swaneycpcc](https://boards.straightdope.com/u/swaneycpcc)\ **Post date:** [December 25, 2011, 5:21am UTC](https://boards.straightdope.com/t/conomist-buffs-how-is-new-currency/607028/27 "2011-12-25T05:21:43Z")
> [@Alley\_Dweller](#): > > No, no. The Fed is not handing out free money to Bank C. That is what a lot of those Zionist conspiracy videos you see on youtube get wrong. Bank C has to give up its valuable Treasury note to the Fed in exchange for the $100. Right, right, that makes sense–that was my second option (bank C doesn’t gain a ton besides cashing out it’s treasury note). But it does seem that the Fed creates free money (for itself) by just typing in a bigger number to the bank’s reserve account. Eventually that money probably gets back into the system too. [Previous page](https://boards.straightdope.com/t/conomist-buffs-how-is-new-currency/607028.md?page=1)