Ralph Musgrave

Can the Fed Really Just Print Money?

Josh Patt is not quite correct to say that “Modern money is credit, meaning a promise to pay a certain value as denominated in a currency.” This is NOT really true of the monetary base, whereas it IS true of the “pyramid of credit” that commercial banks build on the monetary base. It is true that dollar bills (which are part of the monetary base) are ostensibly a liability of the Fed (i.e. a “promise” by the Fed to pay). Indeed the total of all “cash and coin” in a country appears on the liability side of the country’s central bank. But this is a big charade: go along to the Fed and they wont give you $20 of gold in exchange for a $20 bill. Indeed they wont give you anything.

In contrast, every dollar of credit created by commercial banks (the vast majority of the money supply) IS a debt owed by someone to someone else.

Congratulations to Josh for the following two sentences, which are spot on: “Real inflation is caused not only by the amount of money in existence, but also by its velocity, which is how quickly it moves from one person to the next. To get inflation, you need to get people to spend the new money and then to borrow more.” If more of those who comment on the money supply had tumbled to this one, we would save billions of tons of paper, ink and billions of man hours. David Hume in his essay “Of Money” written in 1752 made much the same point. He said in relation to money supply increases: “If the coin be locked up in chests, it is the same thing with regard to prices as if it were annihilated.”

I don’t agree with the following few sentences. “In the present economy people are less able and less willing to borrow and spend money into existence. So, to cause inflation, the Fed needs to replace the borrowing and spending “efforts” of hundreds of millions of people. It’s not clear that Ben Bernanke’s printing press will be able to accomplish this before it destroys the value of the dollar.”

This contradicts the above point where Josh effectively says that inflation will not take off till the increased money supply has raised demand to the point where the economy’s ability to supply cannot keep up with demand. (The “David Hume” point). I.e. the printing presses can roll away, but there will be no effect TILL there has been a significant increase in demand. But WHEN there has been a significant increase in demand (and hopefully not too much of an increase) the problem will have been solved. Employment will have risen. All those folk layed off will be back in work.

An absolutely beautiful example of this is taking place before our very eyes at the moment. The US monetary base has DOUBLED over the last quarter. This is totally unprecedented in the history of the Fed or any central bank as far as I know. And what is the result? Practically nothing. But if this money supply increase continues, the point will come where there is an effect.