Is the Fed Printing Money?

By Scahill, Edward M. | Journal of Economics and Economic Education Research, September 2015 | Go to article overview

Is the Fed Printing Money?


Scahill, Edward M., Journal of Economics and Economic Education Research


INTRODUCTION

Although M1 and M2 definitions of the money supply include paper money and coins "in the public's hands" (excluding amounts held by banks and the government), a greater percentage of the money supply of the United States is in the form of demand deposits and other checkable deposits at banks, which the Federal Reserve System (Fed) controls through open market operations. Many non-economists assume that changes in the supply of money are the result of printing currency. This misunderstanding is reinforced by frequent references to the Fed "printing money" in newspaper and magazine articles. The title of this paper is taken from one such reference published in The Wall Street Journal (Hilsenrath, 2010). Two other examples are Tanous (2013) and Wessel (2013). In his article Wessel wrote: "The Federal Reserve...has printed money--more than $2 trillion--and pumped that into the economy." The authors of such articles refer to the Fed printing money knowing that the phrase should not be taken literally. Time and space are needed to explain the intricacies of monetary policy to those who do not understand them whenever the Fed's actions make headlines. For many readers such explanations are unnecessary. Therefore, figurative references are made to printing money assuming that readers know the truth; but many non-experts do not.

Currency is printed at two locations operated by the Bureau of Engraving and Printing (BEP): Washington, D.C. and Fort Worth, Texas. The BEP is part of the U.S. Department of the Treasury, not the Fed. In Section 16 of the Federal Reserve Act of 1913 the United States Congress ceded to the Fed the legal authority to issue currency:

   Any Federal Reserve bank may make application to the local Federal
   Reserve agent for such amount of the Federal Reserve notes ... as
   it may require ... The Federal Reserve agent shall each day notify
   the Board of Governors of the Federal Reserve System of all issues
   and withdrawals of Federal Reserve notes to and by the Federal
   Reserve bank to which he is credited. (Federal Reserve Act)

Each year, the Fed's Board of Governors submits an order for new currency to the BEP. The print order is "... based on historical payments to and receipts from circulation, destruction rates, and also to build inventories of new-design notes before issuance...most of the notes... replace unfit currency that Reserve Banks receive from circulation." (Federal Reserve Note Print Order, 2014). The currency order is submitted to the BEP approximately 60 days prior to the beginning of the BEP's fiscal year (October 1st).

This article uses data from the BEP to describe the amount and value of U.S. currency printed from 2003 to 2012. Estimates of "currency in circulation" using these data are similar to measures published by the Fed. Because the BEP identifies the origin of the printed currency (Washington or Fort Worth) and the Federal Reserve District to which it is distributed, BEP data can be used to estimate the value of currency--total and per capita--placed into circulation in each District. These amounts far exceed estimates of the amount of currency held by consumers as reported by the Federal Reserve Bank of Boston's Survey of Consumer Payment Choice (SCPC).

THE LEGAL AUTHORITY TO PRINT MONEY

Section 8 of the United States Constitution empowers "The Congress ... [to] borrow money on the credit of the United States ... To coin money, regulate the value thereof ..." and "To provide for the punishment of counterfeiting the securities and current coin of the United States." (Constitution) The Federal Reserve Act of 1913 created a Board of Governors and twelve regional Reserve Banks to "... provide the nation with a safer, more flexible, and more stable monetary and financial system." (Purposes and Functions, 1)

THE MISSING CURRENCY MYSTERY

Consumers have a variety of payment choices--including debit cards, prepaid cards and online banking payments--that reduce the need for currency to conduct transactions. …

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