New money, the modern way

Date posted: April 20, 2011

Some worry that the new money the Federal Reserve has created is beginning to show up in the form of higher prices for food, gas and commodities. N.C. State University economist Mike Walden explains how the Federal Reserve has created this money.

“There is an old joke … among economists — probably not very funny to other people — … that the Fed should actually print money and just fly helicopters around the country and just dump the money out and that is how to get the money in the hands of people and get it spent. Unfortunately, it doesn’t work that way. It is all done electronically now, as most things are.

“What happens … is if the Fed wants to increase the money supply, the amount of money in circulation, they will do it through the accounts the banks (have) with the Federal Reserve, and any bank has an account with the Federal Reserve Bank. And what happens simply is that if the Federal Reserve wants to increase the money supply, they will simply adjust upward the amount of money in each bank’s account. Now they will actually take something back from the bank in compensation. They will take back some investments called treasury securities. So it is simply done with a click on a mouse or a click on a keyboard. And it increases the money supply.

“Now since the recession began, the Federal Reserve has upped the money supply by over $2 trillion. And the other thing that people should realize about the Fed is they can alter the money supply very, very quickly. Some people are worried that the Fed has actually created too much money — that it has resulted in inflation. Once the Federal Reserve perhaps changes its attention to inflation, they can pull back. That is, they can reduce that money supply again with the click of a mouse.”

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