That link says Bureau of Engraving & Printing is where money is printed and send to the Federal Reserve System.
And that there is $2 trillion worth of Federal Reserve notes in circulation.
So that say the government says we need $3 trillion in circulation does BEP or the federal reserve just say okay here is $3 trillion bills free money or do they say here is $3 trillion dollars but you have pay debt of money for the $3 trillion I’m printing for you?
It’s a little confusing exactly what question you’re asking.
The Federal Reserve controls all aspects of the money supply. But it is never “giving away free money” in any form. One method is Open Market Operations, where the Fed will (to increase the money supply) buy securities (usually Treasuries) for cash. The cash (which the Fed has authority to just electronically define into existence) is paid to the prior owners of those securities. The Fed’s balance sheet increases with the addition of the securities that it has bought, and the prior owners of those securities now have cash instead of securities, so there is now more total cash in the system that needs to be invested or spent on something else. The supply of cash has increased.
In principle the Fed could print physical banknotes and use them to pay when conducting Open Market Operations, and the economic effect would be similar. But in reality of course the money supply is managed using electronic money, and it is electronic money that the Fed magicks into existence.
The Fed does not directly use paper money to control the money supply and it certainly doesn’t give away paper money or any form of money. The Fed just makes sure enough paper money is available, and banks can convert electronic money to paper money to the extent they need it for customer withdrawals. The switching between electronic cash and physical banknotes is not something that changes the total money supply, it’s just a conversion to whatever form of money is convenient.
I am not sure I undertood the question either, but have the impression the idea of the trillion dollar coin could be relevant. An idea, btw, the Fed has rejected so far. Stay tuned:
It seems interesting to me that
The issuance of paper currency is subject to various accounting and quantity restrictions that platinum coinage is not. […] Platinum bullion coins can […] be minted in any denomination, whereas coins in any other specified metal are restricted to amounts of $50, $25, $10, $5 and $1. The concept of minting a very high denomination coin relies on the platinum clause as a loophole for the executive branch to raise revenues without congressional oversight.
As for paying, it is rather the opposite: the government earns seigniorage when minting coins or printing notes. That is why the idea of the trillion dollar coin sprang up in the first place.
Printing money creates more money but reduces the value of all money. Pretty good deal if you get the new money and they don’t print too much of it. That is the basis of our deficit spending policies.
[my bold]
There’s some nuance to this. The Treasury doesn’t fund our budget deficit by printing cash, not even in the non-literal sense of magicking electronic cash into existence.
The government funds the deficit by issuing more debt, and issuing debt does not increase the money supply. So long as the market remains confident in the government’s ability to repay the debt, there is no increase in the money supply and no direct inflationary pressure.
But what can happen of course is that if the budget deficit gets out of control the market can lose confidence in government debt. The government may ultimately have insufficient revenue and be unable to issue more debt to pay off the old, and in the endgame be forced to print money to pay it off, massively increasing the money supply debasing the currency. The probability of such an endgame is reflected in the interest rate that the market demands to buy long term government debt.
Basically, the government goes and borows from the public. It issues bonds, which it will have to pay in X years. (and when it has to, it creates another bond to sell to pay back the first). Hence the problem that the deficit keeps growing uless tax revenues are greater than expenditures… (Which IIRC hadn’t happened recently except a few years when Clinton was president).
The central bank (the Fed) can lend money to other banks, thus increasing their money supply. AIUI, this is where printed money also goes, although as mentioned above, most “created” money is electronic.
Any bank, too, can increase the money supply - it takes deposits and lends them back out. Bob has $1000 and deposits it in First National Bank. The bank ten lends it to Fred. Bob has $1000, safely banked for now, and Fred has $1000 to invest in his Widget business expansion. Total assets in play, $2,000. As long as those who have deposits don’t want all their money all of a sudden, this works. (The Fed sets rules on what percent of the total deposits a bank needs to keep to cover anyone who asks to take out some of their deposit) Fred might deposit some of that $1000 in the bank until the construction is done, so the bank now lends out $600 to Sally. And so on.
Similarly, Joe has a credit card, buys a TV. He will have to pay the $5000 eventually, but for now, that’s a loan too. And, the store won;t get their money for a week or two, but they have $500 they can rely on.
Economists have used four main measures, known as M0, M1, M2, and M3. The four measures are nested: M3 includes M1 and M2; M2 includes M0 and M1.
The main feature distinguishing the four measures is the liquidity of their components (how easily one can exchange the asset for cash). The smallest and most liquid measure, M0, is strictly currency in circulation plus commercial bank reserve balances at Federal Reserve Banks; M0 is often referred to as the “monetary base.” M1 is defined as the sum of currency in circulation, demand deposits at commercial banks, and other liquid deposits; it is often referred to as “narrow money.” M2 is everything included in M1 plus savings accounts, time deposits (under $100,000), and retail money market funds. M3 is everything in M2 plus larger time deposits and institutional money market funds. (Because the cost of estimating M3 was thought to outweigh its value, the Fed stopped reporting it in 2006.)
I think the OP was just trying to ask about actual cash money = paper with dead presidents on it.
As others have said almost simply and clearly …
unfortunately, a lot of non-experts and news media especially use the phrase “printing money” to mean issuing government debt. Which is completely disconnected from the actual idea of printing cash with dead presidents on it.
When the government prints cash (not “prints money”), there are some costs for paper and ink and labor and a factory and whatnot. So a shiny new e.g. $100 bill doesn’t represent $100 in pure profit for the government. Maybe only $99; I don’t have a solid figure for their costs of production. It isn’t much per bill, but it isn’t zero either.
Now cash bills wear out and are turned in for destruction at a fairly continuous predictable rate. So some cash production is just replacing a raggedy bill to be burnt or shredded with a shiny new one. That doesn’t affect the cash supply in circulation, nor does it affect any of the several measures of the money supply which includes all the other forms of money above and beyond cash.
If the BPE is asked to create more cash than is needed for replacement, and that additional cash is flowed into circulation, then the cash supply and the various money supplies are larger. But that doesn’t come about through government debt issuance.
It says there is $2 trillion of paper money in circulation, I guess most of the money is in people wallets and banks.
What I’m asking is every dollar bill printed is it free money or debt the bank or government has to pay the federal reserve.
Who has pays the debt of $2 trillion of paper in circulation? And if ww3 starts and the government needs 5 trillion dollars and the federal reserve prints 5 trillion dollars is it free money or debt the government has to pay the federal reserve or Bureau of Engraving?
AIUI, the money supply is what the Fed says it is. They are the final authority.
If the government needs more money -as mentioned - it issues bonds and borrows it. Where it gets interesting, is if we were talking about West Ruritania’s federal bank, and they could not find enough people willing to lend money for government debt measured in Ruribles, then the Beloved Leeder phones the president of the WRFed, and they lend the government the money. The government now has the necessary money to pay the civil servants manning BL’s mansion, and when they go to the bank, their pay has been transferred from the government’s bank account at the WRFed to the civil serveants’ banks and ito their accounts. Meanwhile, WRFed holds a bunch of certificates saying “the government owes me $R 1Billion”. Theoretically the govrnment will repay that out of tax revenue. Usually… not.
This is what “printing money” really means. The amount of money is mostly the electronic deposits, not so much actual paper cash. The amount of money in circulation is what the Fed allows.
If the government does not, then slowly (or quickly) people realize there’s a lot more R floating around, raise prices. Foreginers will demand more R per 1 US$. Inflation follows. So… print more. So the trick to a steady economy is to allow the money supply grow just enough. Too much too fast - inflation. Too little, people can’t get money (i.e. borrow for that new car, too expensive) and business slows down. Deflation. The trick to running a fed is to keep things just right. If things are getting too hot, raise interest rates, demand to borrow slows down. Too slow, cut rates, people borrow more. When people want to borrow more, banks will borrow from the Fed at the posted rate.
The thing with US$ is that it’s the reference that many other nations use to measure their currency, and what is used in a lot of international transactions, such as oil sales.
Obviously it’s a bit more (lot more) complex than this. But basically the Fed is like the bank in Monopoly, the amount of money in cicrculation is whatever it allows others to have, except since things are electronic, it never runs out. It just has to be careful how much it gives out. (I.e. loans - but the banks repay those loans, and interest. As people earn money, the bank earns money and can replay those loans)
And to answer the last question - the Fed lends money to banks electronically, but sometimes it has to send paper cash (and coins) too. Same process. I assume the Fed “owns” the mint, so money printed is simply more assets the Fed can distribute (loan or exchange).
I think the answer was above. Banks buy printed money from the government. The money use for the purchase is ultimately rooted in the government and whatever debt structure exists. But the printed notes are just another token for the real government backed money. It doesn’t form part of the government issued money. It is just a government managed system to provide a convenient token that operates separate to the reserve.
In general printed notes or coins go into circulation via the banks. The banks don’t get them for free.
ETA, ninjaed above.
Excellent post. The word for the above is seigniorage – the profit the government gets for the value of paper money sold to banks, above the cost of production. There also can be seigniorage for coins, but it costs a lot more than one cent to manufacture a U.S. penny, and more than five cents to manufacture a nickel. A reasonable deficit-fighting bit would be to stop producing pennies, nickels, dimes, paper dollars, and five dollar bills, and add a new five dollar coin. But the United States is extremely conservative about such changes.
One thing I like about your post is failure to use the word “electronic.” Computerization did not fundamentally change how money works.
The OP seems to still really be struggling with the idea that “cash” = paper bills is NOT the same thing as “money”. Don’t mix up those words, they mean very different things.
The amount of cash can go up while the amount of money is going down and vice versa.
It occurs to me that for the trillion-dollar coin trick to work, it essentially means the government (not the federal reserve or Federal Bank) owns the mint and its output. Therefore, when it mints that trillion dollar coin, the government has another trillion to spend. It deposits the coin to the Fed and now has a trillion in its account in electronic money, which it can then draw on to spend according to the most current budget.
So printing money is only for banks? They can’t print money if the government needs money for WW3?
The Bureau of Engraving & Printing or Federal Reserve will not give money to the government if the government has no money? It is only for the banks not the government that has no money for war, disaster or lockdowns with Covid or new pandemic so on.
So they don’t print money when the government has no money they issue bonds?
So the Engraving & Printing or Federal Reserve will not print money and give it to the government if the government needs money they tell the government to issue bonds?
The Federal Reserve expands rhe money supply by selling bonds.
With some of that enlarged balance, they can order cash from the Treasury Department, making part of the enlarged money supply tangible as currency.
They receive the new currency and ship it to banks that need cash on hand. Most times, the banks just get electronic transfers of virtual money, like your paycheck getting direct deposited instead of a pay window handing you a stack of bills.
A lot of that money is sitting idle - e.g. suitcases full of $100 bills in drug money in foreign countries. Could you imagine if the US recalled all $100 bills - making the old ones worthless after some time period - with a maximum of how much an individual could convert?
They did just that in India, a few years ago.
Pretty much correct.
When the U.S. government’s tax revenues fall short of expenditures (which they always do, except for a brief happy period in the 1990s) the U.S. government issues bonds to make up the difference. Issuing bonds is equivalent to getting a loan.
In certain economic situations, the Federal Reserve may create electronic money and use this money to purchase government bonds, but the purpose of this is to expand the money supply, not to finance debt.
Note that many countries in the developing world, do do what you have outlined. They print money to make up for shortfalls in government revenue, and as a result suffer chronic inflation.
Yes, it was chaos. We arrived in India just after - the availability of new bills was erratic, just look for the ATM with a lineup. (worse, IIRC it was anything 500 and over, so about $2.) You couldn’t exchange more than a certain amount of rupees, You needed a bank account, so foreigners like those hippie backpackers were SOL. Try to imagine the news which was showing those white tourists busking and panhandling in India…
Worse, I saw an estimate that a significant percentage of US foreign currency in circulation is counterfeit.
The purpose of India’s recall was to flush out the hordes of cash which they believed was fueling an underground (untaxed) economy.
The whole point is, if you’re Ruritania (or Zimbabwe or Argentina or Nigeria who have had trillion-denomination bills) you just print money. The USA and most western economies do what their Fed says and limit the expansion of the money supply, so they only print a certain amount of money according to Fed guidelines.
Instead, the government operates like any other business, issuing bonds and using the money from those bonds.
And as others have been pointing out, the amount of actual cash is an insignificant amount compared to electronic money. Think about it… We have retirement savings approaching $1M - depending on how you count my pension entiltement (fund the company runs) well over a million. I have a line of credit of tens of thousands if I want money. Credit card limits over $10,000. etc. etc. Yet for actual cash in my pocket, I have about $400 - $300, a fairly high amount, because my wife got reimbursed for an employee event, and maybe $150 or more in collectibles, like a $100 bill from 1960’s and some obsolete $1 and $2 bills and older versions of paper money. I pay my monthly bills online without touching any real cash.
I suspect, unless someone middle class has real credit problems or doesn’t trust banks, their story is similar. Even retail, especially after the epidemic, is more credit and debit than actual cash. The Fed can change the “money supply” far more easily, quicker, and to more institutions with a few waves of a mouse than by printing cash.
So the quick answer for the OP is - the government does not just print money. They let the Fed manage electronic money. They let supply and demand at retail banks determine how much of that is converted to hard cash for consumers, and swap that to the treasury for electronic cash so as not to grow the money supply excessively.