With a national debt of over 31 trillion dollars and an economy in turmoil, it is not uncommon to hear someone ask why the government doesn’t just print more money, both to get the country out of debt and to help its citizens afford supplies as prices escalate. Don’t be confused, though. The concept of printing more money is entirely different than using software to print checks as checks serve as a voucher for actual cash.
The notion of printing more money is a fallacy because it would make things far worse instead of improving the current situation. The economy is often like a circus performer walking a tightrope, it leans one way or the other as it tries to maintain balance, but if pushed too hard, it can fall.
Who Is In Charge of Printing Money?
The government is a system of checks and balances, and while it is easy to point the finger at the president when things go wrong, he is not in charge of the printing process. That responsibility goes to the Treasury Bureau’s Department of Engraving and Printing, with the U.S. Mint handling coin creation.
While it may seem like this organization has the power to make these decisions, that is also incorrect; they are just cogs in the machine, doing the bidding of a higher power. That higher power is the Federal Reserve System, also known as “The Fed.” As the central bank of the United States, they have jurisdiction over when to inject new money into the economy and how much.
Why Doesn’t The Fed Print Us a Lot of Money?
There is an excellent reason why flooding the market with extra money is much like adding fuel to a burning economy. Let’s set up a hypothetical situation to help visualize what problems can occur if extra money suddenly enters the economy.
One day, the Fed decides to give everyone a million dollars, like a stimulus check – just, hey – here’s your money, go crazy. That seems like a pretty good deal, right? Everyone just became millionaires!
You have all this money now and likely have significantly more buying power than before. While you may be a conservative soul and decide to stow away a significant portion of that money in the bank to ensure you can live comfortably, you will likely have a laundry list of things you wish to purchase. This may include a new house, a car, luxury items, and all the food you could ever want.
To simplify matters, let’s focus on a specific item, margarine, which has recently suffered inflated prices. Everyone has more money and is out making the most of it. Margarine begins to fly off the shelves. Suddenly, there’s a margarine shortage because people are buying at a greater rate than what margarine companies can produce. Following the basic rules of supply and demand, margarine prices go up partly because now those producers need to acquire additional equipment and more workers to meet the new demand.
This is happening across the board as there are shortages in all sectors, and those workers will request more money because they want to be able to afford the same amount of essential goods they always have, but those goods cost significantly more. Those prices go into the production costs, and margarine continues to rise.
This cycle rarely ends well because once things settle down, it is rare that prices return to their previous levels, even if they do go down. The result is that the dollar buys far less than before, increasing inflation further.
Where Does the New Money Come From?
When the Fed decides that establishing new money is in the economy’s best interest, it does so, but not generally through the means you may expect. The idea of new money often conjures an image of the printing press at work, sheets of fresh green mint rolling off the presses.
In reality, this is not the case. The Fed periodically sends a printing order to the Treasury Department to replace damaged and destroyed legal tender and ensure enough circulation for society’s needs. Still, most of the influx of funds happens on a digital level.
While the Fed has a few means of designating new funds, the most common way is to purchase U.S. Treasury Bonds or accounts that they can easily convert into monetary assets to deposit into bank reserves. As these transactions do not involve actual bills or coins, they enter the reserves as digital numbers, just as you see when you check your bank account online.
This also gives them the power to mete the funds out slowly to reduce the consequences of a sudden monetary injection into the economy. The most common way is through loans, which even provide a return on those funds through interest payments. You gain access to this new money to get what you need (which is where the money goes), but you pay it back to the bank with interest.
This is ideal because banks only need to have some of their funds on hand at any given time; they can make loans from the money you and other consumers deposit with their institution. If they face requests for a withdrawal of more than they have on hand, they have that amount sent to them from their account with the Fed.
What Happens When I Write or Deposit a Check Online?
These techniques also come into play when you write or deposit a check, essentially a written promise from one party to pay a specific amount to somebody else.
When you receive a written check, once the bank determines that the document is legitimate, they add digital money to your account, which they will cover with their onhand funds (other people’s money) until they successfully transfer the funds from the check writer’s bank or account to yours.
Nowadays, most people use software for printing checks and while there are a few differences, the central concept is the same. Remote mobile deposit captures the image and relevant information from the check, then converts it to digital data that the bank verifies and processes just as they would a tangible copy.
Writing E-checks simplifies the process even more. When you submit your E-check transfer, the receiving bank verifies the accuracy of the transaction, and then your bank will send the funds over.
The interesting point is that, much like the Fed injection of funds, these transfers take place without involving a single printed bill or coin until the recipient makes a withdrawal.