Printing Money or Currency?

I am continually hearing people make the statement "when the country needs more money, they just crank up the printing press and print more money". Apparently this is a common misunderstanding of how our money system works.

I will come right out and make a flat statement. The supply of money in this country is not increased by cranking up the printing press. First, it is necessary to distinguish between currency and money supply. They are not the same thing. Currency, those pieces of coin or paper bills, make up about fifteen per cent of our country's money supply. The rest of our money supply is in the form of line entries in ledger, so to speak. An example of this type of money is your bank checking account balance or your savings account. For each new dollar, five dollar, ten dollar, fifty, one hundred or one thousand dollar bill which is printed, a deduction is made on a line entry in a ledger. A thousand dollar new bill is printed and $1000 is deducted from the ledger. The amount of money remains the same.

How is new money produced? Up until about forty years or so ago, there was only one way the money supply could be increased. A bank depositor deposits, say, $1,000 in his bank account. The Federal Reserve Board allows that bank to loan 85% or approximately $850 of that deposit to a borrower. Hence, $850 in new money is created. But it doesn't end there. That borrower deposits the $850 from his new loan into his checking account. His bank can now loan out 85 % or $722.50 to a new borrower. That borrower deposits his $722.50 into his checking account and now his banker can loan 85% or $614.125 to a new borrower. That can continue on down until every cent possible has been loaded out. Theoretically, in a pure situation, five thousand dollars in new money can be created from that original $1000 deposit. In actuality only about $3000 in new money will be created from this particular example.

I used 85% in my example and the per cent which the Federal Reserve Board allows banks to loan from new deposits is generally around that per centage but, The Federal Reserve Board can tighten up the money supply by decreasing the per centage which can be loaned just as it can increase the money supply by increasing that per centage. In other words, The Federal Reseverve Board controls the amount of money in circulation. By the way, the Federal Reserve Board is non-political and is NOT a part of the Administation. Neither a president nor anyone in his administration has any say in whether or not the money supply is increased or decreased. The Federal Reserve Board keeps a constant finger on the pulse of our economy and they alone determine if more money is needed in circulation.

I said up until about forty years ago this was the only way additional money could be created in the United States. About that time, Congress changed all that by making it possible for the Federal Reservie Board its self to increase the money supply. I've never understood just how they are able to do this, but it has to do with the amount of money the Federal Reserve Bank its self loans to the country's banking system. So now the country has two ways to increase the money supply, both controlled by the Federal Reserve Board.

As you can see, the printing presses have nothing to do with increasing the money supply. They can only increase the amount of money in circulation in the form of currency.
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