Have you ever found yourself wondering how the Federal Reserve can just…print money?
Although it might not be one of life’s most pressing questions, it is a process that not many understand.
Let’s start by dispelling the most popular misconception: the Fed does not have a printing press in the catacombs of Fed HQ in Washington D.C.
Fed Chair Jerome Powell doesn’t wake up in the morning, walk down to the engraving press at the Fed, and just start printing money…because the Fed doesn’t have an actual printing press.
That would be far too mundane.
Instead, they have a magical printing press that creates money out of thin air.
That’s right, printing presses are so last-century. The Fed is cool and hip and uses digital credits to increase the money supply.
I mean, how many of you get a physical check in the mail from your employers? Most people today get their checks via direct deposit into their bank accounts.
Your employer doesn’t feed cash into your bank’s ATM, it merely credits your pay into your account.
The same principle applies to how the Fed “creates money.”
Most of today’s money supply is digitally debited and credited to major banks who then lend the money that lives in the digital ether, thus creating more magical money.
This form of lending system is called the “fractional reserve banking system.”
Being that it is the holidays, a holiday classic film provides an apt description of the fractional reserve banking system.
In the classic film It’s a Wonderful Life, George Bailey, played by Jimmy Stewart, faces a run on his bank on the first day of the Great Depression. George Bailey then describes to his panicking customers how the banking system works. You can watch that clip here.
Poor George. He just wanted to travel the world, but that pesky savings and loan kept pulling him back. And don’t even get me started on that evil old man, Mr. Potter.
But I digress…
In addition to the Hogwarts wizarding world of money creation, there are other forms of currency that don’t require a physical printing press.
Money doesn’t have to be physically present to work in exchange, as has just been detailed.
Also, businesses and consumers use checks, debit and credit cards, balance transfers, and online transactions to increase the money supply.
And that is how the Fed “prints money.” However, they still do it the old-fashioned way some of the time.
Paper currency is officially called Federal Reserve Notes, and the Fed pays for the printing, transportation, and destruction of damaged currency.
But that is the boring way. Creating money using a computer is much more fun.
Like the 80s song goes: “girls [and central bankers] just want to have fun.”