Have you ever found yourself wondering how exactly money enters the US economy? Do they just print it when they feel like it or is it more complicated than that? By now i am sure you have heard of the US treasury, the US agency responsible for "minting" money, but is this how all money comes to be in the US? Not exactly, only about 3% of the US money supply exists in physical form, the rest is electronic. This is where a group known as the Federal Reserve comes in.
The Federal Reserve has the power to create what are known as "federal reserves", electronic currency that hold the same value as paper currency. Say the US government needed money, we will use $1,000 as an example since that is what the picture on the left displays (but as this is the government it would more likely be something like $1,000,000,000).
The Gov. would exchange what are called government treasury bonds for what are known as federal reserve notes, these notes would have an attached value of $1,000 and from this exchange $1,000 has been added to the US money supply.
$ The reserve notes are the electronic currency i mentioned earlier and the treasury bonds can best be described as a loan contract as the government is promising to pay this money + interest back to the Fed.
You are probably wondering what happens to the money promised to the Federal Reserve right? From here the Federal Reserve now has $1,000 in its reserve account as well (not literally but it does have the promise that the Gov. will pay this money back to them). What can it do with this promised money you ask? Well because of what is called Fractional Reserve Banking the Fed. can hold onto $100 and use the other $900 as the basis for new loans to other people in the U.S. through any of its other banking organizations. How? Easy! They just print the new money on top of the existing money supply.
But doesn't that mean that money is technically created out of debt? Well, yes technically money is created out of debt or simply put Money is Debt.
The Federal Reserve has the power to create what are known as "federal reserves", electronic currency that hold the same value as paper currency. Say the US government needed money, we will use $1,000 as an example since that is what the picture on the left displays (but as this is the government it would more likely be something like $1,000,000,000).
The Gov. would exchange what are called government treasury bonds for what are known as federal reserve notes, these notes would have an attached value of $1,000 and from this exchange $1,000 has been added to the US money supply.
$ The reserve notes are the electronic currency i mentioned earlier and the treasury bonds can best be described as a loan contract as the government is promising to pay this money + interest back to the Fed.
You are probably wondering what happens to the money promised to the Federal Reserve right? From here the Federal Reserve now has $1,000 in its reserve account as well (not literally but it does have the promise that the Gov. will pay this money back to them). What can it do with this promised money you ask? Well because of what is called Fractional Reserve Banking the Fed. can hold onto $100 and use the other $900 as the basis for new loans to other people in the U.S. through any of its other banking organizations. How? Easy! They just print the new money on top of the existing money supply.
But doesn't that mean that money is technically created out of debt? Well, yes technically money is created out of debt or simply put Money is Debt.