Re: Printing Money

[Allin Cottrell <cottrell@xxxxxxx>]

On Thu, 23 Feb 1995, Jonathan Dune wrote:

> Does anyone know who decides, and why, to increase the quantity of
> printed money?  As the GNP expands, doesn't the supply of dollars also
> need to expand?  Where is all this money coming from, and where does it
> begin circulation?  (I am not talking about replacing worn currency)

The quantity of actual currency ("printed money") simply responds to
the cash needs of the banks, as they draw on their reserve accounts
to meet their customers' cash demands.

Yes, the money stock needs to expand in line with the expansion of
GDP (otherwise real economic expansion would have to be accompanied
by progressively falling prices -- which, incidentally, is what
Hayek recommended).

How come the banks' reserve accounts are always (or almost always)
big enough to enable them to draw the cash their customers want
in a growing economy?  Basically because the central bank carries
out Open Market Operations, buying Treasury securities from the
banks and/or their customers and in exchange crediting the banks'
reserve accounts.

So that is, typically, how the "new money" gets into circulation:
in exchange for Treasury debt purchased by the central bank.
It's also possible that new money is created to finance government
expenditure in excess of tax revenue, in which case it enters
circulation in exchange for the real goods or services bought
by government.  But in a system like that of the US, where there
is an institutional separation of Treasury and central bank, and
the central bank is supposed to refrain from direct financing of
government spending, this does not happen on a significant scale.

==========================
Allin Cottrell
Department of Economics
Wake Forest University
cottrell@xxxxxxx
(910) 759-5762
==========================