Debt: The First 5,000 Years

by David Graeber

Contrary to popular belief, the U.S. government can’t “just print money,” because American money is not issued by the Federal government at all, but by private banks, under the aegis of the Federal Reserve System. The Federal Reserve, in turn, is a peculiar sort of public-private hybrid, a consortium of privately owned banks whose Governing Board is appointed by the U.S. president, with Congressional approval, but which otherwise operates autonomously. All dollar bills in circulation in America are “Federal Reserve Notes”—the Fed issues them as promissory notes and commissions the U.S. mint to do the actual printing, paying it four cents for each bill.8 The arrangement is just a variation of the scheme originally pioneered by the Bank of England, whereby the Fed “loans” money to the United States government by purchasing treasury bonds, and then monetizes the U.S. debt by lending the money thus owed by the government to other banks.9 The difference is that while the Bank of England originally loaned the king gold, the Fed simply whisks the money into existence by saying that it’s there. Thus, it’s the Fed that has the power to print money.10 The banks that receive loans from the Fed are no longer permitted to print money themselves, but they are allowed to create virtual money by making loans ostensibly, at a fractional reserve rate established by the Fed—though in practice, even these restrictions have become largely theoretical.11

Important note! It's been a while since I read up on the modern central banking system. I know that when the government runs a fiscal deficit, it must borrow to make up the difference - usually through the issuance of T-bonds. The Fed then buys these T-bonds (in essence, loaning to the government) through non-interest-bearing notes - which means printing money for the government (though the printing itself happens at the Mint, for which as the passage states, the Fed pays the Mint 4 cents for each dollar bill printed). The Fed then loans these dollar bills to banks at a low interest rates, and banks may then lend these to the public at a higher interest rate - effectively creating money. The Fed also places limits on banks for how much the banks can lend to the public for every dollar lent to the banks by the Fed - known as the fractional reserve rate. This is usually 10-to-1, meaning for every dollar lent to the banks, the banks may then lend out at most 90 cents to the public - though this ratio also includes any existing deposits and bank assets. Apparently there are loopholes that banks use to circumvent this limitation.