The Myths Of Paper Money
By Benjamin Gisin
There are two popular myths about paper money. The first is that
government prints so much paper money that it causes inflation.
Secondly is that there is nothing backing the paper money. These
myths are so prevalent they have taken on a mantra of reality. These
myths are often associated with interests wanting to sell gold.
These myths are usually put forward as the cause of inflation and
economic ills. They draw attention away from how the monetary system
works, resulting in the wrong medicine recommendation for our
economic woes. The monetary system is a process of indebtedness that
curtails the economy by saturating it with debt and then being
unable to find enough qualified borrowers to keep the economy going
with more debt.
Paper money is a complex process that is a small piece of the larger
money process of indebtedness. The purpose of paper money is to
provide bank checking and savings account holders the option to
convert what is in their bank account to paper money. Paper money
has nothing to do with government printing to finance its operations
or cause inflation.
following explanation of the paper money process will provide some
of Engraving and Printing, which is a division of the United States
Treasury, prints all denominations of paper money upon order from
the Federal Reserve Bank (Fed). The Fed is a private banking
corporation created by law with responsibilities to report its
operations to the government. The Fed pays the Bureau of Engraving
and Printing for the cost of printing the paper money.
puts the printed money in its vaults and awaits orders from banks
who need paper money to cash checks or for ATM machines. Paper money
is a debt of the Fed.
must create the reserves that banks use to buy the paper money from
the Fed. This is done by the Fed buying, on the open market, U.S.
Treasury and other debt securities. When the Fed buys securities, it
credits the reserve account of the bank where the securities dealer
has his account. It is this debt the Fed has to banks that banks use
to purchase the paper money from the Fed at face value.
collateralizes the cash it ships to banks with the same basket of
securities it purchased to create the reserves.
Fed owes banks in terms of reserves, is transferred to what the Fed
owes in the form of cash at the bank.
customer cashes a check or makes an ATM withdrawal, the bank lowers
what it owes the customer�s checking/savings account in exchange for
the paper money which is an obligation of the Fed.
the person unfamiliar with banking process, these six points of
explanation can be confusing. The bottom line is that paper money is
issued by banks (not government). The issuance of paper money is
offset by the simultaneous extinguishing of checking/savings account
money. The more paper money in circulation, the less money is in
circulation via checks and debit cards.
the use of one form of money (paper money) extinguishes another form
of money (checking and savings deposits). Primarily, it is the
banks� creation of checking and savings account money, and further
secondary lending of that money, that causes inflation and increases
the amount and speed of money in circulation.
of 3/31/09 (source: FDIC) the U.S. banking system was obligated for
$8,954 billion in customer deposits. As of 4/2/09 (source: Federal
Reserve) there was $865 billion of paper money in circulation. When
you deposit paper money in a bank, your bank account goes up by the
same amount as the paper money that is now out of circulation and
paper money issued by the Federal Reserve is collateralized (backed)
by some type of security. In recent months, the Fed purchased
securities representing bonds collateralized by residential homes.
Some of these bonds now collateralize some of the paper money in
circulation (source: Federal Reserve).
printing, issuance, and collateralization of paper money have little
to do with financial and economic meltdown. The nation�s economic
woes are the result of a financial system based entirely on complex
processes of indebtedness. The money products of these processes
(bank accounts and paper money) make an inferior means of exchange
by virtue of saturating the economy with debt, barriers to access in
that someone must qualify for credit and their use as savings,
rather than circulating media.
more information and discovering what options are emerging,
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Benjamin Gisin is a veteran banker and former senior agricultural
approval officer for one of the nation�s largest agricultural banks.
Since 1998, he consults businesses and agricultural producers facing
credit challenges. He writes and lectures extensively on the
evolution of money, economics and food security.