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Myth #3: The Fed prints money

In his 5 myths debunked about the Federal Reserve, Mark Hamrick of Bankrate, asserts that the Fed does not print money.  He is correct, but he obfuscates the issue.

The Bureau of Printing and Engraving prints the paper dollars that we use for money, but paper dollars (and coins) account for only about three percent of the money supply.  The bulk of the money supply is in the form of digital dollars: checking accounts, savings accounts, and CDs.

So, why do Fed critics say that the Fed “prints money.”  Because the Fed causes money to be created through several different mechanisms.  Let’s start with quantitative easing.

When the Fed buys “assets,” which today are debt obligations of the federal government and private debt,  it simply credits the selling banks’ Fed accounts and records the debt obligations as assets.  Where does the Fed get the money with which it credits the selling banks’ accounts?  It is created out of “thin air.”  The money with which the Fed bought the assets did not exist until the Fed made bookkeeping entries on the Fed’s ledger.  Ergo, money is “printed.”

The Fed also permits its member banks to create money out of thin air via fractional reserve banking, which involves machinations that are a little more difficult to grasp than the Fed’s creating money for its asset purchases.  Suffice it to say, fractional reserve banking also involves the creation of money via bookkeeping entries when banks lend money.

The Fed is part and parcel to the creation of money out of thin air” That the Fed does not print the physical dollars does not matter.  It causes money, that did not exist before, to come into existence and inflates the money supply, thereby devaluing the money already in existence.

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