Currency has been in American society for a long time. Actually, this question is for any kind of money really. Just wanted to specify so I make more sense,
So how did the government actually get USD/paper money into rotation? Did they just give it out? People traded in the old currency?
In: Economics
Most dollars in the system are IOUs.
Banks are in a club together. The leader of the club is called the Fed. They tell the other banks how much money they each get to play with. They do it by moving numbers on a computer to tell each bank how much they can lend out.
The banks then use what’s called a fractional reserve. They take money people put into the bank and loan it out to other people.
Then those people also take the money they borrowed and put that in another bank who then does the same thing. The banks then loan it out again multiplying it again.
Since 2020 the fractional reserve required amount is 0% so there’s no limit to how much this could be done. So most of the money is IOUs for other money which are IOUs for other money which originally was just numbers on the Fed’s computer.
But the Fed indirectly put limits on the banks on how much they can do this depending on what they think the economy needs. This system has its merits and also its downsides. But it’s built on layer on layers of IOUs
The federal government prints it, sends it out to regional federal reserve banks. Those then fulfill requests for cash from normal banks and credit unions in their region.
Sometimes this is done when cash gets turned in as damaged and the bills need to be replaced, other times if a bank branch is low on cash they will digitally transfer money to the federal reserve who then send the bank the equivalent cash for it.
Now how does the government get more cash in circulation when no one is requesting it? Simple, they just pay people with it. The government employs a lot of people, and pays a lot of private contractors to do things. So say you worked for the National Park service and they direct deposit 1,000 dollars to your bank account, whenever you go to withdraw cash, your bank will need to request that cash from the federal reserve
Great question. There are several ways a country can circulate it’s currency:
1)Exchange it for old currency. For example, if people had money from the Articles of Confederation, the government could “buy” those old dollars and destroy them to ensure rich people stayed rich and didn’t want to overthrow the system.
2)Buying things of value from citizens. For example, the government can buy someone’s property.
3)Employ people in the government and pay them in the new currency.
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