Part of How Money Works – FAQ

So, in the U.S., who really creates money? The Treasury or the Fed?

This is one of those “gotcha” questions as most people will say:

“The Treasury creates money!”

But those of us who are smart will say,

“No, it’s the Federal Reserve – HAH! –  A Private Corporation – that creates money!”

First of all, the Federal Reserve is not a private corporation, it is independent in that it doesn’t have to get approval from the President or Congress on every monetary decision it makes as that would be a disaster (political back and forth), but, as explained on the website – it’s still accountable to oversight by Congress.

But I digress. Back to who creates money.

Now, if you were one of the smart ones and answered “The Federal Reserve creates money!” Guess what? You’re wrong, as this question is actually a “double gotcha” question!

The Treasury creates money by paying people to do something. Build roads, build schools, hospitals, parks, companies hired to build things, and so on. That money is “printed,” created out of thin air.

When the Federal Reserve “creates money,” it doesn’t. It determines the climate whereby banks are able to LOAN people money.

The key word here is LOAN. When you BORROW money from a bank, you get cash right away, but you still have to pay that loan back. It exists as a credit and a debit on a balance sheet – they cancel each other out. So that is not money created, it is simply borrowed.

When the Treasury creates money, it does NOT borrow it from anywhere. It creates it from scratch and pays it out into the economy to stay there. The public ends up with more money circulating AND they end up with a road they can use.

So, next time someone tells you “The Fed creates money.” You can answer them calmly, and explain why that statement is incorrect.