I ran across an interesting Twitter post yesterday:
Jimmy Song posted the following tweet:
Jimmy Song (송재준)
Challenge: Explain how a central bank prints money in 20 words or less.
At first, I was fooled by this trick question.
The central bank does create money; however, it’s the US Treasury Department that actually prints it.
The Central Bank creates money when it converts debt to cash or credit.
The debt is comprised of Treasury Bills, Bonds, Notes and TIPS.
Cash includes bank accounts and marketable securities. Cash can also refer to checks or any other form of currency that is easily accessible and can be quickly turned into physical cash (paper money or coins).
It’s a common misconception that the Central Bank prints money. The Treasury Department is actually the entity responsible for printing paper currency and minting coins: The Treasury oversees the Bureau of Engraving and Printing and the U.S. Mint.
When we examine the US Money Supply Context Diagram below, we see that there is a big difference between the actual money in circulation (shown in green) and how much money people perceive is in circulation (shown in red):
The magic that multiplies supply of money is called fractional lending.
Commercial banks are only required to keep a small percentage the cash depositors give them. When an individual or business deposits money it only keep 10% of the deposit, aka “reserves”, at the bank for subsequent withdrawals. (It loans out other 90%).
This reserve requirement is set by the Federal Reserve and is one of the Fed’s tools to implement monetary policy. Increasing the reserve requirement takes money out of the economy, while a decrease in the reserve requirement puts money into the economy.
Note: The Central Bank is also known as the “Federal Reserve” and the “Fed”.
This lending process continues many times thereby putting more and more money into circulation. For example, let’s say Alice deposits $100 into Bank A. Bank A turns around and loans $90 (of the $100) to Bob. Bob puts his $90 into Bank B and Bank B turns around and loans $81 to Cindy, etc.
Treasury and Federal Reserve
The U.S. government has a vested interest in the health and welfare of the country’s economy. The Department of the Treasury works hand in hand with the Federal Reserve to maintain economic stability.
Central bank mandate: To keep our money valuable and our financial system healthy.
The Department of the Treasury and Federal Reserve work together to maintain a stable U.S. economy. The Federal Reserve serves as the government’s banker, processing transactions, e.g., accepting electronic payments for Social Security taxes, issuing payroll checks to government employees and clearing checks for tax payments and other government receivables.
The Federal Reserve and the Department of the Treasury also work together to borrow money when the government needs to raise cash. The Federal Reserve issues U.S. Treasury securities and conducts Treasury securities auctions, selling these securities on behalf of the Department of the Treasury. Examples of Treasury securities include:
- Treasury Bonds
- Treasury Bills
- Treasury Notes
- Treasury Inflation-Protected Securities (TIPS)
The U.S. Congress creates the U.S. Federal Budget and grants itself permission to borrow money. The borrowing is executed by the U.S. Department of Treasury when it issues debt contracts (Treasury Bonds and Notes). For example: “We agree to pay the bearer $1,000 sixty days from today.” The Central Bank buys a lot of this debt. (The fact that non-US entities can buy US debt deserves it’s own post.)
A treasury bill is another monetary policy instrument through which our government raises funds for short term requirements and commercial banks invest their short term surpluses by buying these bills from our government.
Treasury Inflation-Protected Securities (TIPS) provides protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.
The Federal Reserve has 12 regional banks that supervise commercial banks in local areas. These regional federal banks are responsible for meeting the physical currency needs of local banks, providing cash and taking excess cash. They also take currency out of circulation when it is deemed to be damaged, counterfeit or just too old. They order newly printed bills and coins to replace discarded notes and coins.
Gaining Understanding and Confidence
It’s easy to get tripped up with questions about how the US monetary system works.
Throw cryptocurrencies into the equation and it can get overwhelming.
I grew up with a mom that was intrigued with US economy, currency, gold and other investments.
I guess that’s why cryptocurrency (and blockchain technology) is so interesting to me.
I get to combine the rhetoric that I heard in my formative years with my education and professional experience.
I invested my time, energy and resources to develop a training course to help others “get it”.
That’s a big part of what my Cryptocurrencies Developers Class is about.
The first class is all about money (what it is, its history and relationship to digital currencies) and would serve as a good educational resource for those in finance and insurance professions.
The rest of the course is about how to leverage our understanding of money and blockchain technologies to build our own cryptocurrency.
Join me in class where we’ll:
- Distill facts from fiction
- Provide pertinent resources on a guided journey of learning
- Provide well structured lab assignments
- Provide starter projects (and completed solutions)
- Provide insightful visual presentations
- Provide a Certificate of Completion to attendees that finish the assignments
… and that’s just the 1st half of the course. In the 2nd half we cover the Ethereum blockchain.
I have condensed this class into an Immersive one week Master Class in Atlanta, GA.
The class location is TBD but will not be far from the airport.
I’m working on getting a package, discounted hotel deal for out-of-town attendees.
Register now, while seat are still available at https://cryptocurrencies.developersclass.com/products/register
Thanks, hope to see you in class! — Lex Sheehan