How Is Money Made in America?
The United States of America uses fiat, paper currency. Fiat, refers to the fact that the government issues the money, placing it in circulation and treating it as if it has intrinsic value. However, the paper notes cannot be redeemed for gold from the federal government itself. Even those notes are more substantial than most of the money in circulation, however.
Other People Are Reading
-
Dead Presidents
-
U.S. currency includes paper bills and metal coins. Coins are made of zinc, iron, nickel, copper and other metals. Metal dies stamp contoured images onto the smooth, flat disks made of these metals. Because the sums represented by these coins are so small, U.S. coins contain no precious metals; they also represent a negligible counterfeiting threat. On the other hand, great pains are made to resist counterfeiters' attempts to duplicate the green sheets of paper bearing the faces of American presidents (and other dignitaries). The paper, made from cotton fibers, is imbued with myriad anti-counterfeiting measures. Microprinting, special dyes, watermarks and metal strips embedded in the cloth are only a few measures employed to confound those who would print their own money.
The Fed
-
The Federal Reserve, the national bank of the United States, releases the cash to circulation. The government also exchanges new bills for old, tattered ones, destroying the old ones in secure facilities.
-
Banks Create Money
-
The physical bills and coins most people think of as money account for about 10 percent of the money in circulation. Banks are required to hold about 10 percent of their deposits in this form. So, if a person deposits $1 million into bank "A," that bank can lend out $900,000 of this. Now the depositor has $1 million in his account, and the borrower has $900,000. The bank is still solvent; it holds $100,000 of the deposit in currency (cash in the vault) and $900,000 in outstanding loans (money that the borrower owes back to the bank).
Fractional Reserve Banking
-
This cycle continues when the borrower deposits the $900,000 into bank "B," which then lends out $810,000 to other borrowers. Now the money supply has grown from $1 million to more than $2.7 million. It is this behavior, far more than the activity of the mints, that creates money.
Potential Problems
-
This system works because usually people leave most of their money in the bank. However, when lots of people want to withdraw the money from the banks, in what is called a "run" on the banks, the banks might not have enough money because of what they have lent out. The U.S. government created the Federal Deposit Insurance Corporation (FDIC), to protect depositors and the banks. As of 2010, the FDIC insurance coverage is $250,000 per covered bank account.
-
References
- Photo Credit money image by cherie from Fotolia.com
