Robert J. Stonebraker, Winthrop University
The Joy of
Economics: Making Sense out of Life
Robert J. Stonebraker, Winthrop
University
The Impact of Money: a Dear Abby Quiz
The letter below, which appeared in June 1992 newspapers, is typical of the off-the-wall questions economists are asked by the general public. Afraid of an errant reply, Abby consulted an "expert" at the U.S. Department of Treasury (who asked to remain anonymous). Abby could not answer it by herself; could you?
DEAR ABBY:
Could you please answer this question we are baffled over at work: Why doesn't the U.S. Mint simply print enough money to just pay off our government's debts, feed the hungry, and house the homeless? We know there must be a logical answer. We just don't know what it is.
-BAFFLED
[A detailed answer follows.]
Extended answer to Dear Abby quiz:
First, the U.S. Mint does not print money, it manufactures coins. Currency is printed by the U.S. Bureau of Printing and Engraving (PBE), a division of the U.S. Department of the Treasury. The PBE website at http://www.moneyfactory.com/ offers more information than you’ll ever want to know.
Second, the BPE does not control the supply of currency; the Federal Reserve System does that. It is the Fed that distributes currency into the economy. The BPE only prints what the Fed orders. No orders; no printing.
Third, the currency operations typically have no impact on the overall supply of money. Remember that most of the nation’s supply of money is in the form of bank deposits, not cash. When you and I are short on cash, we go to the bank and ‘buy” more by writing a check or using an ATM to transfer funds out of our deposits. In effect, we trade one type of money (our checking deposits) for another (cash). The form in which we hold the money changes, but the overall amount of money remains the same. Local banks do the same. Just as you and I hold deposits with a bank, the banks hold deposits with the Fed. When local banks are short of cash they turn to the Fed for more. They trade in their deposits with the Fed for cash. The form of money changes, but not the amount. [How does the Fed change the supply of money? You should be able to explain that one!]
Fourth, and most importantly, we cannot cure the economic woes of the world by increasing the supply of money. Increasing the supply of money can increase the aggregate demand for goods and services [Can you explain how?], but it does not affect aggregate supply. If we are mired in a recession or depression and are suffering from unemployment, the increased demand can be quite useful. The new demand will prompt firms to hire additional workers and utilize idle capacity. But, eventually we reach full employment; we reach the edge of our production possibilities curve. And that’s the end. Without new resources or new technology, we can produce no more. We can flood the economy with money, but money is not a resource. It is not land, labor, capital or entrepreneurial ability. It’s just paper.
Increasing the supply of money does raise aggregate demand, but in a fully employed economy we cannot get additional goods and services. The increased demand will drive up prices and cause inflation, but can create no gains in real purchasing power or real GDP.