Who can really ‘print’ money? The Fed or the Treasury?

23 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.

Tags: Debit-Credit, Money Printing, The Federal Reserve, The Treasury

20 Responses to Who can really ‘print’ money? The Fed or the Treasury?

Ralph Musgrave

December 14th, 2011 at 19:05

“When the Treasury pays for its approved expenditures, it credits currency…” Excuse me? What the Treasury does, when it wants to increase spending by $X is to borrow $X from the private sector, give the private sector $X worth of bonds and then spend the $X back into the economy. The private sector is up to the tune of $X worth of bonds, but does not gain any dollars.

Or have I missed something?

aterzi

December 16th, 2011 at 22:56

The private sector is up to the tune of $X worth of bonds PLUS the $X spent by the government into the economy. The private sector’s net financial savings are now $X higher!

Mark

January 16th, 2012 at 03:55

Come on guys! You’re making this way to complicated and wrong. The private sector has NOTHING to do printing money. The FED buys t-bills and/or T-notes from the Treasury with money they either have already (from maturing T-bills or T-notes) or creates the money out of thin air (ie. PRINTS) the money. The Treasury then spends that money on Medicare, Defence, Social Security, etc…. That’s it, that’s how it works!!!! Somebody had to print $15Trillion in US debt, and it was the FEDERAL RESERVE you idiots.

Andy

January 27th, 2012 at 22:01

@ Mark:
First off, complicated does not equal wrong. simple usually equals incomplete.
Second, let’s do a thought experiment:

You have $100. You buy $500 of goods from some other people, assuring them you’ll pay them next week. 6 days later, you haven’t, and you need an additional $400.
What do you do? You go to the bank and ask to borrow money. The bank prints $400 out of thin air and hands it to you. You pay off your debts, except now you owe your bank that money.
Options? None, really. You either owe a bank $400 plus interest, or you owe a bunch of people $400 bucks plus an ass kicking for spending money you didn’t have.
That’s it, that’s how it works! Somebody had to SPEND a LOT more money than there was to spend, and it was the US CONGRESS that YOU VOTED FOR!! That’s how it works.
But totally, blame the Federal Reserve! After all, when a person accumulates crippling credit card debt, it’s obviously the bank’s fault that they were so irresponsible, and not their own.

Nalliah Thayabharan

May 17th, 2012 at 05:07

US President John F. Kennedy planned to exterminate the privately owned Federal Reserve System. In 1963 he signed Executive Orders EO-11 and EO-110, returning to the government the responsibility to print money, taking that privilege away from the privately owned Federal Reserve System.

Shortly thereafter, President John F. Kennedy was assassinated. The professional, triangulated fire that executed the President of the United States is not the most shocking issue. The high- level coordination that organized the widespread coverup is manifest evidence of the incredible power of a “hidden government” behind the scenes.

Another myth that all Americans live with is the charade known as the “Federal Reserve.” It comes as a shock to many to discover that it is not an agency of the United States Government.

The name “Federal Reserve Bank” was designed to deceive, and it still does. It is not federal, nor is it owned by the government. It is privately owned. Its employees are not in civil service. Its physical property is held under private deeds, and is subject to local taxation.

It is an engine that has created private wealth that is unimaginable, even to the most financially sophisticated. It has enabled an imperial elite to manipulate US economy for its own agenda and enlisted the US government itself as its enforcer. It controls the times, dictates business, affects Americans’ homes and practically everything in which Americans are interested.

It takes powerful force to maintain an empire, and this one is no different. The concerns of the leadership of the “Federal Reserve” and its secretive international benefactors appear to go well beyond currency and interest rates.

dale

May 18th, 2012 at 06:40

Nalliah, while I generally agree with your view of the Federal Reserve, I think you have misunderstood Kennedy’s policy regarding silver.

According to

http://news.google.com/newspapers?id=-q8fAAAAIBAJ&sjid=LdcEAAAAIBAJ&pg=2964,4612588,

on NOv 28, 1961, the Southwestern Missourian reports that Kennedy was presenting to Congress his new policy to replace all 2,5,10 and 20 dollar bills (all based on silver) with Federal Reserve notes, which at that time were based on gold. The reason, and the reason for the EO 11 and EO110 orders, was the lower price of silver. The idea was to transition to the final policy of ending Treasury notes based on silver with Federal Reserve notes based on gold.

Wikipedia confirms that this was the plan, so while I agree with much of your view of the Feds, Kennedy in fact was in the process of ending
Treasury bills and replacing them with Fed notes.

I think he was assassinated for his plans to end the Vietnam War, not for seeking to end the Federal Reserve, which in fact he was in process of transferring authority to print money.

This is my understanding, but I am no expert on this. So I stand ready to be corrected with evidence to the contrary.

Lynn

June 9th, 2012 at 16:50

Nalliah and others, I do wonder where you get this idea that the Federal Reserve is trying to “trick” people with its name? Frequently online, I see people try to “expose” the Fed for not being a federal agency, and they write it like that was some big secret! At my school, we learned both in middle school social studies class and in high school history classes that the Federal Reserve is not a governmental agency. Moreover, I joined an economics club in my high school, and a Federal Reserve analyst would give us lectures once a week (they were very interesting btw!). He would routinely repeat that the Fed isn’t related to the government and otherwise explain to us concepts about money-making that people seem to think are secretive phenomena. This program is open to any high school, public or private, in the nation (I believe it’s nationwide – it’s definitely in places that span from NY to Arkansas. Not sure if it’s out on the West Coast. Also, if anybody’s curious and wants to get this program started at their local schools, here’s the NY Fed website on it: http://www.newyorkfed.org/education/fedchal.html). If anything, the fact that people think they’re being so clever when “exposing” the Federal Reserve just makes me inwardly groan at how stripped bare our public education must have become.

Russell Brown

July 8th, 2012 at 21:26

I find this thread extremely interesting. The subject, alone, is fascinating and complex. Who really understands it entirely? I found this site after reading on a silver dealer’s web site a statement from the dealer about central banks printing lots of money. My immediate thought was: “Wait a minute. Central banks don’t print money.”

It is also fascinating to see how we all bring in our own perspectives, biases and inclinations. Also, thank you, Nalliah, for such an informative history. We can all remember Henry Ford’s famous quote in 1922: “If people really understand money and finances in this country, there would be massive riots in the streets in 24 hours.” That says something. The wealthy always bank on the ignorant or powerless – always have.

I am learning more about the history of money, gold and macro economics and just find it so interesting. What I am learning can be grim and depressing. I remain positive that there will be a day – we probably won’t see it in our lifetimes – when this imbalance of the money holders controlling the economic, social and political will of the world will no longer serve as a viable functioning model on this planet.

We see tremendous social upheaval throughout the world. Arab nations struggling for a new, different order still to be defined. African nations in such disarray. Yet in the United States, I have long said that as long as most people can have a job, go home at the end of the day, have some food and watch tv, there will be no demand for anything more. Yes. this may seem a bit cynical. Will we ever see a day when most Americans can’t work or when those who are accustomed to buying a nice car really won’t be able to? Will we see a day when the rapidly growing disparity between the wealthy few and the truly poor is so great that Henry Ford’s words become a reality?

I think these are good question to ask in these mercurial times. Education is always the greatest tool and friend for an individual and society. Having an economics club or a dynamic economics class ( a subject not even taught in many schools) is a great start.

I always ask: “What can I do?” So, here is what I am doing. I am educating myself about money, gold, silver and banking. I am teaching a class next year at my son’s school on this subject. (thank you, Lynn, for the link. I will check it out.) I talk about these topics with other people. While I cannot control what the Federal Reserve is doing, I can control my own personal finances to a degree. My wife and I are buying gold and silver on a monthly basis – much like dollar cost averaging. We don’t worry about daily, weekly or monthly prices. We just buy some regularly. We think of it as a foundation for our financial stability.

Beyond these things, I don’t loose any sleep over this. This is just one facit of life. The big picture of money and banking is out our hands, but being a kind, loving person who takes responsibility for his or her own life is not.

Robby

August 23rd, 2012 at 15:56

I really need to understand all this, thoroughly educate myself in economics, remain as unbiased as possible and keep my eye on conspiracy theories to a minimum.

September 4th, 2012 at 19:17

The article is correct..the Treasury creates money by running deficits and destroys money by running a surplus. This a deeply misunderstood subject. While people argue that we need to pay down the national debt, they usually don’t recognize that this would massively choke the economy by destroying dollars (less dollars in circulation means the value of a dollar goes up, which means deflation and that our exports are less competitive.)

Benno

September 14th, 2012 at 00:54

Oh? And why would you so necessarily need to *export* your stuff? Oh yes, globalization. lol

Benno

September 14th, 2012 at 11:59

CF, if it’s so easy to say that having to pay all the debt would be economic suicide is too obvious to mention, if debt’s purpose were only a meassuring then why budget and make people suffer for exuberant bank losses which was caused by false kapitalization on their part in the first place. Money is a commodity and equally so banks create a need for money by proxy => ‘business plans + marketing strategies = investment loans’ is just one of the many mechanics.

Lynn, a Fed analyst always lags behind the facts. While academics theorize economics and argue whether to follow the Kenian’s or Smith’s model the folks at the Fed are having a ‘good larf’ since those who control the debt of a country, control the country whether you like the idea or not. Winners show their cards?

Gunzo

September 15th, 2012 at 00:30

After reading all these posts, I remain confused. For the moment, I am assuming for the sake of simplicity either Govt and / or Fed can print the money. Let me ask a fresh questions which could be like this: (1) How much money was printed in 2011? (2) Did that money straight away go to the government coffers for their “approved” expenditures? (3) Why did they decide to print only that amount of money, why not more why not less and how the limit is decided? (4) If some posters here say that Govt Treasury can print money. If so, why are they coming to the market to borrow the money instead of simply printing the money? I would greatly appreciate. Gunzo.

FutureEconomist

November 20th, 2012 at 08:18

Even when the government issues money the Fed must credit the governments account when it buys treasuries, so the Fed still issues the currency. The Fed also credits accounts when it buys the debt of private entities, just like it does for the government.

Andrea Terzi

November 20th, 2012 at 12:40

@FutureEconomist
This is not the point.
The point is that Fed ’spending’ is (normally) lending, thus buying ‘money forward’ with ‘money spot’.
And Treasury spending creates new financial assets in the private sector.

Enrique Woll Battistini

December 23rd, 2012 at 06:59

The article’s author states that “…When the Treasury pays for its approved expenditures, it credits currency,” and this is true if the statement refers to the Treasury’s accounting entry for the transaction: asuming that the debt has already been registered as a liability, the transaction’s accounting would be “debit payables, credit currency.” I think the discussion got way off track…

Tom

December 30th, 2012 at 16:10

This article is wrong about who prints money, it is not the Fed.
According to the Fed:
http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html

“The Federal Reserve Banks distribute new currency for the U.S. Treasury Department, which prints it.”

The Treasury prints it.
The Fed distributes it, NOT printing it.

Greg

March 2nd, 2013 at 00:48

In this 21st century USA, except for $1.2 trillion in cash and coin, money exists and moves through electronic channels between electronic balance sheets in computers. Every entity, you me, Lockheed Martin, First National Bank of Your Town, the US Treasury, has an account ultimately managed by or for the Federal Reserve. You send a $100 check for federal tax to the treasury, your account gets debited $100, the Treasury credited $100. The Treasury needs $100 billion to run the Govt. it makes out $100 billion in treasuries in the name of the Fed, the Fed credits the Treasury account with $100 biillion on which the treasury cuts checks to pay Lockheed for a new F-35. Exit the FED, we have the USPS carrying cash back and forth and we end up back in the 19th century…Good Luck to us all.

Who can really ‘print’ money? The Fed or the Treasury?

20 Responses to Who can really ‘print’ money? The Fed or the Treasury?

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