Who Actually Creates Money?

The Government Doesn't Make All the Money

When it comes to conjuring up money, most people think that the government is a giant, money-printing machine. The process is a bit more involved than simply tossing a hundred dollar bill on a copier. In any case, money creation does not just happen overnight. The Government Printing Office, in the US, is responsible for the printing of the fiat money we use everyday. The Mint is responsible for coining the US currency, which falls under the Treasury department. Other than physically printing and minting the bills and coins we use, there are other avenues for creating money.

The Government's Role in Making Money

The Federal Reserve Bank, also known as The Fed, is the central bank of the US, and is entrusted with the responsibility of conducting monetary policy in the economy. Through its monetary policy operations, including the setting of key interest rates, the bank focuses on regulating the money supply in the economy. The Federal Reserve can literally create money out of thin air, through its digital reserves. The Fed can also provide physical money to the commercial banks, as and when they need it. The money creation capacity does not give The Fed the ability to conjure up the exact amount of cash each American needs.

Commercial Banks Can Create Money Too

In addition to The Fed's ability to create money, commercial banks can also stand at the forefront of the creation of money. Every time a firm gives a loan to a citizen, it creates a deposit in the borrower's account. The borrower can then use this newly created deposit to pay for goods and services. The Fed does not have a corner on the money creation market, since commercial banks can also create deposits out of thin air. If a bank gives a loan to a consumer, it increases the country's money supply by the amount of the loan. Of course, banks can only create money if they have sufficient capital to fund the loans they extend. A bank's capital adequacy, liquidity, regulatory requirements, interest rates, and the demand for its products, all play a role in determining how much money the bank can create.

Who Creates the Most Money?

From the discussion above, it is evident that the American government is not the single entity that creates all the money in the US economy. While it may print the currency, the money creation process involves various players. The Treasury prints and mints the currency, The Fed makes policy decisions and conducts monetary policy, and commercial banks create most of the money in the economy. The banks' share of money creation is made possible by the deposits of currency they receive from the Treasury. The Federal Reserve's money creation ability enables it to control the overall money supply in the economy, while the commercial banks' monetary creation is through the extension of loans to borrowers.