Okay, as I understand it, The US mint prints currency to keep pace with the amount of money estimated to be lost or destoryed over the course of any given year.
So my first question is:
How do they feed this money back into the system?
Next, I understand they try to avoid printing more money then is destoryed because it would lead to inflation, making the dollar worth less. If that’s true, couldn’t they make the dollar worth more by printing less then is destroyed?
Banks “buy” it at face value, that is they transfer credit to the central bank in the amount of the cash they receive.
Yes, but they don’t want to do that. Deflation is not a pretty thing, as the Japanese have found out over the last few years. A low (but positive) inflation rate is the goal of most central banks these days.
[nitpick] The US Mint does not print currency, it mints coinage. Currency is printed by the Bureau of Engraving and Printing. [/nitpick]
I would imagine they have the answers to all your questions somewhere in this website:
http://wfhummel.cnchost.com/index.html#UNDERSTANDING%20MONEY
From here: http://wfhummel.cnchost.com/monetarybase.html
All monetary base money originates with the State. The State must issue enough to avoid a shortage of what the private sector must use to pay its taxes, but not so much that the demand for it disappears. The private sector acquires base money from the spending of the Treasury. However, the Treasury recaptures it through taxes and the sale of its debt securities. This balanced inflow against outflow with the Treasury is a necessary condition for the central bank to manage the price of base money.
As far as physically feeding the currency back into the system …
They print the money, then transfer it to one of the Federal Reserve banks. Then they distribute smaller bundles to local banks.
Does printing (or not printing) money have that big of an effect anymore? I thought that most of the money floating around in the world economy was just in the form of points of data stored in bank computer systems, rather than actual physical cash.
No, they don’t. The Bureau of Engraving and Printing, which prints currency, doesn’t think twice about inflation. Its only job is to print enough currency so that Federal Reserve Banks have enough in stock to meet demand from commercial banks. Commercial banks in turn want to have enough money to keep their teller drawers and ATM machines stocked and their customers happy.
The job of managing the money supply and controlling inflation belongs to the Federal Reserve Board of Governors, and they work mostly by buying and selling securities on the open market, for which they pay via wire transfer.
If the Fed pursues an inflationary monetary policy, this eventually results in increased demand for currency and the Bureau of Engraving and Printing has to print more. They have no choice in the matter. They don’t set monetary policy, they react to it.
No, all they could do would be to piss off a lot of banks by telling them, “You can’t exchange that ratty old bill for a crisp new one because we didn’t print enough. And if the ratty old bills jam your ATM machines, tough patooties.” This would not be an effective way to promote deflation, even if that were a worthy goal (which it isn’t).