Where does money come from?

Question

In 1910, there was $3,148,700,000 in circulation in the United States. In 2000, there was $571,121,194,344 in circulation in the United States. The Federal Reserve prints it, and then "pays it out" to banks and lending institutions. Is this a Federal give away? Should I start a bank? It cannot be a loan, because a loan would have to be paid back, with interest, from the current pool of money. That would shrink the supply, not expand it. How does this cash get into circulation without having to be returned to the Feds? I have seen numerous answers about this, but none seem to directly address this question. Who has been paid this 565 billion dollars over the last 90 years in order to get this cash into circulation?

And how can I get a piece of it? ;)

The Bureau of Engraving and Printing makes the plates. The individual Federal Reserve Banks actually do the printing.

So, does this mean that the National Debt can never be repaid, because it is required in order to keep the money supply adequate?

So what your saying is that the Government prints securities, and that is the real origin of money. The securities are created out of thin air, and then sold to the Treasury, who buys them with freshly printed money. Is that about right?

Answer 1

1. The Federal Reserve doesn't print the money. The Bureau of Engraving and Printing, a part of the U.S. Treasury department, prints the bills.

2. How do the printed bills get into circulation? Actually, that is fairly easy. Whenever the Federal Reserve wishes to increase the money supply, it performs what is known as "Open-Market Operations". Basically, the Federal Reserve buys U.S. Government securities on the open market from brokers. The Federal Reserve is allowed to do this using an account that is bottomless. The Federal Reserve credits the accounts at the Federal Reserve of the banks that the brokers use. Whenever those banks need printed bills to provide their account holders with physical cash, they can either turn in old, worn-out bills, or draw on their account at the Federal Reserve.

The Federal Reserve isn't some evil conspiracy. It is controlled by a governmentally appointed Board of Governors. The banks aren't "owned" by international bankers or private individuals. In fact, BY LAW, private individuals, corporations, and foreign governments are not allowed to own Federal Reserve shares. Member banks are required by law to "subscribe" to shares in the district banks and the amount they have to subscribe to is set by law. The member banks do not have a say in the matter. Additionally, even though the Federal Reserve holds about $800 billion in U.S. Government securities and collects interest on that, it must return excess earnings to the U.S. Treasury. This can clearly be seen in the audited financial statements of the Federal Reserve.
http://www.federalreserve.gov/boarddocs/rptcongress/annual06/pdf/audits.pdf
Those audited financial statements are part of the Federal Reserve's Annual Report to Congress.

EDIT: The Bureau of Engraving and PRINTING does indeed print the Federal Reserve Notes. The Federal Reserve DOES NOT perform this task. Bills are printed at BEP facilities in Washington, D.C. and Fort Worth, TX.

Because the physical Federal Reserve notes in existence must be backed by something of worth, the answer is yes, the Federal debt can never be entirely eliminated. However, if all other debt was eliminated, except for only the amount the Federal Reserve holds, then the interest rate paid on the debt would practically drop to about 1%. This is because the Federal Reserve returns excess income to the U.S. Treasury. Since the largest source of Federal Reserve income is interest income on the debt that it holds. In 2006, the U.S. Government paid $36.5 billion to the Federal Reserve as interest on the approximately $780 billion in debt that the Fed holds. The Federal Reserve returned $29.1 billion to the Treasury. Net result is the U.S. Government paid $7.4 billion in interest on $780 billion, that is an interest rate of less than 1%.

EDIT #2:
No, think of U.S. Government securities as I.O.U.s. The Government prints T-Bills, T-Notes and T-Bonds and sells them at auction. That is how the government borrows money. Anybody can buy these securities. However, the government will not pay back the principle on those securities until the maturity date. If you buy a T-Bond with a maturity date of 11/2017, the government will pay you interest on that T-Bond every year, but you can't get the principle back until 2017. The only way to get your money back is to sell the bond on the open market.

The Federal Reserve buys T-Bills, T-Notes, and T-Bonds on the open market. When it does this, it uses an account that doesn't really exist. However, it credits the accounts of the brokers banks at the Federal Reserve with the correct amount and that increases the money supply. When you see a news story that says the Federal Reserve injected $41 billion into the economy or market, that is what they did. In that respect, the Federal Reserve does create money. However, those are not physical printed bills.

Most of the total money supply is not physical money. That is because banks can lend out most of the money that is on deposit with them. As a simplified example, let's say that I deposit $1,000 in physical printed bills in a bank. You come into that bank and take out a loan for $900. The bank gives to you $900 in printed bills. My account says I have $1,000, however, the bank now only has $100 in physical printed bills on-hand. You are holding $900 in physical printed bills. There is now $1,900 in the money supply, but there is only $1,000 in physical printed bills.

In order for the Federal Reserve to order more physical printed bills, it must either show that existing bills have been destroyed, or it must have enough of the right kinds of assets to back the new physical printed bills. So, when the Federal Reserve performs open-market operations and buys government securities, it can then order additional physical printed bills from the U.S. Treasury Bureau of Engraving and Printing.

It is similar with commercial banks as well except that the commercial banks deal with the Federal Reserve. In order for banks to receive physical printed bills, they must either turn in old, worn-out bills or they make a withdrawal from their account at the Federal Reserve. Let's look at another simplified example. A few days ago, the Federal Reserve performed an open market operation and bought T-Notes. The broker who sold the T-Notes has an account with Bank of America, N.A. The Federal Reserve credits the Bank of America's account at the Federal Reserve and the Bank of America credits the broker's account. If Bank of America decides it needs additional printed bills, it can make a withdrawal from its account at the Federal Reserve and request printed bills which will then be transferred by armored courier to the Bank of America.

Does that make it clear?

Answer 2

In a round-about way, the $500B (now about $800B) is paid to the government.

Let's review how the money supply is increased step-by-step

- When the Fed decides to increase the money supply, it buys Treasury bills on the open market with thin-air money.

- This action replaces the Treasury IOU held by the public with new money.

- Some or all of this new money will be deposited into banks thereby increasing the aggregate of deposits.

- Federal Reserve member banks maintain deposits at their local Fed branch.

- Member banks will generally store excess reserves at the Fed that can be used to clear checks and transfer money between banks.

- When a bank needs currency, it draws down upon their deposit at the Fed.

Those $800B in T-bills held by the Federal Reserve? Consider that permanent debt that never has to be paid back.

By law, all money must be collateralized and the T-Bills represent that collateral. When the T-Bills mature, they are replaced with newly purchased ones.

What about all that interest that the Treasury pays the Federal Reserve on those T-Bills? By law, Federal reserve excess revenues (income after expenses) have to be returned to the Treasury. So the Treasury gets back 90%+ of the interest paid.

Answer 3

From the Department of Treasury in Washington, D.C. and Federal Reserve Banks located in Boston, New York City, Philadelphia, Richmond, Chicago, St. Louis, Dallas, Minneapolis, Kansas City and San Francisco.

Answer 4

Basically it is just printed by the "Federal Reserve Banks" , which by the way are PRIVATE not federal!

Answer 5

it all has to do with intrest and inflation, banks barrow from the fed for a great example of this read tom clancy's Debt of Honor, but the key to remember is that the bulk of our nations welth is in electronic curency, that actual paper and dollars are a small percentage

Answer 6

Banks create money, not from their own earnings or from the funds deposited by customers, but from the borrowers' promises to repay loans. Most importantly, borrowers not only promise to repay, but to repay with interest, and the bank writes the amount of money of both into the borrower's account.

Grignon opens with a story from antiquity. In the days before paper money, goldsmiths produced gold coins and kept them safe for the purchaser in the same way that banks hold deposits today. These goldsmiths soon noticed, however, that purchasers rarely came in for their actual gold and almost never all at the same time. So the gold merchants began issuing claim checks for the gold which made the exchange of gold in the marketplace easier and less cumbersome. Thus, paper money was born which made doing business much more convenient. Eventually, goldsmiths began loaning money to customers and charging interest on the loans, and borrowers began asking for their loans in the form of claim checks. The goldsmith shared interest earnings with depositors, but since no one actually knew how much gold he was holding, he got the idea that he could lend out claim checks on gold that wasn't actually there and soon started becoming enormously wealthy from the interest paid on gold that didn't exist.

Thus began the power to create money out of nothing, but it wasn't long before bank runs began, and banking regulations evolved regarding how much money could be lent out. However, the regulations allowed a ratio of 9 to 1-that is, banks could lend out 9 times the amount of the deposits that were already there. This policy has come to be known as Fractional Reserve Banking. Regulation also arranged for central banks to support local banks with emergency infusions of gold, and only if there were many runs at once would the system crash.

Fast forward to 1913 when that so-called progressive president, Woodrow Wilson, signed into law the Federal Reserve Act which created the banking cartel now in charge of America's money system. For those who have not seen Aaron Russo's DVD "From Freedom To Fascism" run don't walk to see or purchase it. It is required viewing for understanding the Federal Reserve System and the power it has over the U.S economy and over our individual lives. Very few Americans know how money is created and even fewer know how the Fed originated and what it actually does. Does anyone really believe this is an "accident"? As the media guru Marshall McLuhan is reported to have said, "Only the small secrets need to be protected. The big ones are kept secret by public incredulity."

Whereas U.S. paper currency used to be backed by gold, that is no longer the case, and we have instead a fiat currency backed by nothing except the word of the Federal Reserve that the money is worth its stated value. Moreover, money today is created as debt, that is, money is created whenever anyone takes a loan from a bank. In fact, every deposit becomes a potential for a loan-a process which can be and is repeated many times, ultimately creating infinite amounts of money from debt.

Whereas the 9 to 1 ratio reigned at the beginning of banking regulation, today in some banks, ratios are as high as 20 to 1 or 30 to 1, and frighteningly, some banks have no reserves at all!

The bottom line is that banks can create as much money as we can borrow!

One wonders how individuals, banks, governments, and other entities can all be in debt at the same time, owing astronomical amounts of money. This question is answered when we consider that banks don't lend actual money; they create it from debt, and since debt is potentially unlimited, so is the supply of money.

But what is so wrong with this scheme? Hasn't it been working all these years? Actually, there are several things very wrong with it.

The first issue is that the people who produce the real wealth in the society are in debt to those who lend out the money in that society. Moreover, if there were no debt, there would be no money.

Most of us have been taught that paying our debts responsibly is good for ourselves and for the economy. We imagine that if all debts were paid off, the economy would improve. In terms of individual debt, that's true, but in terms of the overall economy, the exact opposite is true. We are continually dependent on bank credit for money to be in existence-bank credit which supplies loans. Loans and money supply are inextricably connected, and during the Great Depression, the supply of money plummeted as the supply of loans dried up.

Secondly, banks only create the amount of the principal of loan. So where does the money come from to pay the interest? From the general economy's money supply, most of which has been created in the same way.

A visual image is helpful. Imagine two pools of water-one full and one empty. The pool with water in it represents the amount of the principal of a loan; the empty pool represents principal plus interest. The pool of principal has only a certain amount of water in it, so that it can't possibly fill up the other pool of principal plus interest. The rest of the water needed to fill the pool doesn't actually exist and has to be acquired from somewhere.

The problem is that for long-term loans, the interest far exceeds the principal, so unless a lot of money is created to pay the interest, a lot of foreclosures will result. In order to maintain a functional society, the foreclosure rate must be low, so more and more debt must be created which means that more and more interest is created, resulting in a vicious and escalating spiral of indebtedness. Furthermore, it is only the lag time between the time money is created to the time debt is repaid that keeps the overall shortage of money from catching up and bankrupting the entire system. It takes only a few second of reading the headlines of the financial pages during this month, August, 2007, to notice that foreclosure rates and lag time are threatening to meltdown the entire U.S. economy. The preferred method of the Federal Reserve and central banks addressing this calamity is, yes, you guessed it: to create more debt. The lowering of interest rates in recent years, the bombardment of credit card applications we find regularly in our mailboxes, the red ink in which the United States government is drowning are all an attempt to stave off the collapse of the entire system.

Can any sane human being believe that this situation can persist forever? What is the inevitable outcome of a fiduciary game of musical chairs? Monetary historian, Andrew Gause, answered this question:

One thing to realize about our fractional reserve banking system is that, like a child's game of musical chairs, as long as the music is playing, there are no losers.

And finally, a system based on fractional reserve banking is, to say the least, not sustainable because it is predicated on incessant growth. Perpetual growth requires perpetual use of resources and the constant conversion of precious resources into garbage just to keep the system from collapsing.

Grignon suggests that in order to begin addressing and resolving the nightmare of money as debt, we must ask four pivotal questions:

•1) Why do governments choose to borrow money from private banks at interest when governments could create all the interest-free money they need themselves?

•2) Why create money as debt at all? Why not create money that circulates permanently and doesn't have to be perpetually re-borrowed in interest?

•3) How can a money system, dependent on perpetual growth, be used to build a sustainable economy? Perpetual growth and sustainability are fundamentally incompatible.

•4) What is it about our current system that makes it totally dependent on perpetual growth? What needs to be changed to allow the creation of a sustainable economy?

A crucial assumption that must be questioned is the practice of usury or the charging of interest for lending money. Grignon asserts that it is a moral and a practical issue because it necessarily results in lenders ending up with all the money, particularly when foreclosures happen. Not only is debt deplorably profitable for lenders in terms of interest and service charges, but when borrowers cannot pay, as in the case of housing foreclosures, lenders walk away with the proceeds. In a recent article "Panic On Wall St.", Andrew Leonard explains how obscenely advantageous subprime and liar loans have been for lenders and provides damning evidence to support the long-time assertions by Catherine Austin Fitts that the housing bubble has been engineered by centralized financial systems.

In a transformed economy, which I do not anticipate happening in the twenty-first century, banks would exist as non-profit services to society-lending without charging interest at all. But, as Grignon says, if it's the fundamental nature of the system that's causing the problem, then tinkering with the system can't solve the problem. It must be replaced.

One solution might be the replacement of paper dollars with precious metals, which of course, could once again become cumbersome and inconvenient, unless the economic system had experienced collapse and digital and paper transactions were no longer possible.

Perhaps the best solution offered by "Money As Debt" is the creation of locally-based barter money systems in which debt is repaid by hours of work valued at a dollar figure. Additionally, government spending on infrastructure, not using borrowed money, would also create value locally and nationally.

The Federal Reserve banking cartel has been shrouded in secrecy and lack of information among the American people regarding its creation and functioning. One American president appeared to have understood it very well:

Whoever controls the volume of money in our country is absolute master of all industry and commerce...when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.


~James Garfield, 20th President Of U.S.

Assassinated, 1881

"Money As Debt" is not only a must-see for any American who wants to be politically and economically literate, but is particularly crucial for high school and college students to see in order for them to understand how the money works in the United States. Yet we should not assume that the film's simplicity of presentation ranks it as less than adult because most adults in this nation are clueless regarding the connection between money and debt.

I personally hold no hope of changing the money/debt system which is truly the eight-hundred-pound gorilla in the American economic landscape. What I do envision, and what must happen, in my opinion, is its total collapse, whether gradual or sudden, so that the transformation and relocalization of the nation's economic system will be possible, which it is not in the current milieu. However, what we are presently witnessing in the bursting housing bubble and credit crisis may well be the beginning of the end of "money as debt."