In: Flash Cards23 Jul 2011
We are often told that the Fed prints money, while the Treasury can only borrow. Yet, this statement is inaccurate.
Well, if we narrow down the question to who has the power to print physical currency, the answer is plain: The Fed prints banknotes and the Treasury prints/mints coins.
Yet, the question is worth asking to discuss which authority has the power to credit the private sector with currency, adding to private income–which is what most people mean when discussing, or reproaching, or wishing ‘money printing.’
Sure, the Fed does this when it pays its employees, or buys a new computer system, or pays interest on bank reserves: the employees, the computer supplier, or the bank are credited with currency, adding to their incomes.
But the bulk of the Fed’s monetary operations don’t do this: When the Fed makes loans, or buys securities, the Fed trades currency with financial assets, not adding to the income of the currency recipients. The Fed just modifies private (notably, banks’) balance sheets: holdings of currency increase while holdings of other financial assets fall.
How about the Treasury? When the Treasury pays for its approved expenditures, it credits currency, adding to the income of the private sector. The opposite is true when the private sector pays taxes: currency is transferred to the government, and thus gets out of circulation, while private disposable income is likewise reduced.
Thus, the Treasury has the power to ‘print’ (or ‘unprint’) money through spending and taxing. The Fed does not have the same power.