Printing money?

Trivia question:  How much money has the Federal Reserve printed in its entire ninety-five-year history?

Answer:  $0.  The Bureau of Engraving and Printing, part of the federal government’s Department of the Treasury, prints all the money.  And none of those bills become “money” (i.e., part of the money supply, M1 or M2) until they’re held by the public anyway.

Am I being pedantic?  After all, those dollar bills are “Federal Reserve Notes” and are delivered to the twelve Federal Reserve Banks upon request.   I don’t think it’s pedantic, though, as there’s a world of difference between printing money and dropping it from a helicopter (as described in countless economics classrooms and which would be very inflationary) and how those bills actually do hit the street (generally not covered in econ classes, an omission that has always mystified me*, and which is not so inflationary).

Anyway, what brought on this post is the constant chatter in the media and the blogosphere about how the government or the Fed is printing money.   (Of course this chatter is most pronounced on the right.  The three minutes I heard of Limbaugh’s show this year were devoted to some witless sarcasm about we should all be allowed to print counterfeit money because the government is already doing it.  Har de har.)

Economists are generally agreed that “fiat” (i.e., legal-tender) money is desirable and not particularly inflationary as long as the stock of money doesn’t grow too fast.  (The old definition of inflation as “too much money chasing too few goods” still applies.)  Economists also agree that it’s dangerously inflationary for governments to run deficits and pay their bills by printing money.   The “printing money” charge, since it’s usually made by people who are decrying the government deficits and debt, is basically an accusation that this is going on right now. While that accusation is false on its face, an equivalent way to “monetize the debt” is for the government to borrow directly from the Fed, by selling Treasury bonds and bills to the Fed.  Now, that is not happening either, since the Fed buys its Treasury securities from banks and other third parties, but those secondary purchases are also an equivalent way of monetizing the debt, since every time the Fed buys a Treasury bond (say, for $1000) it credits the seller with $1000 in reserves or cash.   Upshot:  The Fed monetizes some of the debt whenever it buys Treasury securities, regardless of whom it buys them from.

I confess, this is kind of a “Eureka!” moment for me, as I’d heard about twenty years ago that some 10-15% of the national debt is monetized and couldn’t understand just how.  I heard that in a lecture by Nobel Prize-winning economist James Tobin and figured he knew what he was talking about.  He explained it in The Concise Encyclopedia of Economics:

‘At year-end 1990, federal debt outstanding was $2,569 billion, of which only 12 percent, or $314 billion, was monetized. That is, the Federal Reserve banks owned $314 billion of claims on the Treasury, against which they had incurred liabilities in currency (Federal Reserve notes) or in deposits convertible into currency on demand.’

So, then, how much of the national debt is being monetized today?  As Casey Stengel said, you could look it up.  As of 3 June 2009:

Federal Reserve holdings of U.S. Treasury debt:  $606.2 billion

U.S. Treasury debt held by the public:  $7.1 trillion

The Fed’s holdings of Treasuries, divided by the total amount held by the public, equals .085.  So only 8.5% of the current national debt is being monetized, a smaller amount than in 1990.  The possibility that mounting national debt might someday bring pressure on the Fed to monetize a lot more of it should not be dismissed, but to charge that either the government or the Fed is already printing vast sums of money to pay off the debt is mendacious, ignorant, or both.  I’ll leave the last word to my former student who wrote on an exam:

‘Monetizing the debt is when the Fed prints money to cover the government’s defecates.’

(*How the money gets from the Fed to the street:  A simple example:  Your bank anticipates it’ll need, say, $10,000 for next week’s deposit outflows.  It contacts its regional Fed bank to withdraw $10,000 in cash from its reserve account at the Fed.  The Fed sends over the $10,000 in an armored car, and the bank puts some of that cash in its ATMs.  You withdraw $200 at the ATM.  And there it is.)

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2 Responses to “Printing money?”

  1. The Fed does not print money « Blogging Through the Wreckage Says:

    […] Fed creates reserves, not money.  I’ve covered this one before.  Fed Chair Ben Bernanke has been making the same distinction lately, though it seems he’s […]

  2. Did S&P’s downgrade actually help the Treasury bond market? « Blogging Through the Wreckage Says:

    […] notes, and bonds as part of its open market operations and “quantitative easing”? Not quite, though it does count as monetizing the debt. The big difference is that the Fed, with a few distant exceptions like during the world wars, does […]

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