RobbZer0 wrote:Okay. I may have been wrong about what I said. I don't fully understand the process of printing FRNs. So I agree with you. But I'd like to have you show me some proof of how this is so. Believe me, don't think I'm putting a smug, kind of "I-don't-think-so" tone in this sentence. I'd really like to see how it actually works.
"Miscommunication is the root of all evil."
- Unknown Author
This is going to be a brief explanation.
First, bills are printed by the Bureau of Engraving and Printing (BEP) (part of the U.S. Treasury). Coins are minted by the U.S. Mint. The Federal Reserve tells BEP how many bills and in what denominations are needed. The important part is that new bills either replace worn-out bills or are an increase to the amount of printed bills in circulation. Most new bills replace worn-out bills.
The Federal Reserve cannot simply tell the BEP to print $100 billion in new bills without having an equal amount of certain types of assets on-hand. This is specified by law, Title 12 U.S.C. § 411 and § 412.
You may ask, "How does the Federal Reserve get these assets?" The answer to that question lies in one method the Federal Reserve uses to create and destroy money. The Federal Reserve uses open market operations in order to make direct adjustments to the money supply and to implement monetary policy in regards to the federal funds rate. If the Federal Reserve decides to increase the money supply, the Domestic Trading Desk of the Federal Reserve Bank of New York will contact several securities dealers. These "primary dealers" will compete on the basis of price. The Domestic Trading Desk will accept the quotes that meet its goals. To increase the money supply, the Federal Reserve will buy U.S. Government securities. When the orders are filled, the Federal Reserve will credit the accounts of the dealers banks at the Federal Reserve. The money to credit those accounts with is basically created out of thin air. Money is destroyed in much the same way. Instead of buying securities, the Domestic Trading Desk will sell securities on the open market. Once the order is completed, the Federal Reserve decreases the account of the dealers banks. This money disappears into thin air. BTW, trades of this nature are performed several times a week. The Fed can inject money one day and then take it back out of the market the next day or even just a few hours later.
These bills are transferred to the member banks of the Federal Reserve system in much the same way. The member banks must either turn in worn-out bills or draw down their accounts at the Federal Reserve district bank.
Does that make it clear? It can be a confusing subject.
Edited to correct my typo from Title 18 to Title 12.
Light travels faster than sound, which is why some people appear bright, until you hear them speak.