Hello,
My question is not related to how the fed puts paper money in circulation and replaces paper money etc… It is more about how does such a system get set up in the first place.
When the first USD notes were printed, I would imagine hundreds of years ago, how did they end up in the hands of citizens. Did the gov issue bonds to the fed at that time, and the fed gave the gov currency in return and then the gov used that money to make purchases thus putting into circulation?
Thanks,
There was no fed hundreds of years ago
they first used metal coins like gold. then they realized that it took a while to mint them so they switched to paper. each state actually had its own paper currency. until the us revolted and needed to finance a war. congress started printing a national currency called the continental that they used to pay soldiers and merchants. the continental was backed by the future taxing power of the us (if they won). the continental was mass produced like crazy and became a laughing stock. no one wanted it and its value fell to pennies within a decade.
thus came alexander hamilton, who was a senior member of the washington’s military staff, the leading member of the federalist party, and the father of the federal reserve. he created a national bank that was in charge of minting currency and they followed the gold standard. which meant that each dollar printed could be exchanged back for gold thus establishing and preventing the depreciation of the paper currency.
us currency built trust this way and the stable usd became so good, that every country began using the usd as a substitute to gold. eventually the us hit turbulent times and started printing money to pay for the war in vietnam and their social policies (social security). because of this massive printing the us stopped exchanging the gold for paper money since it was unsustainable considering they were printing so much. anyways, the value of a dollar continues to depreciate again every year, the way to retain its value is to purchase us bonds that generate a rate deemed by teh world as risk free. Paper backing paper, Fiat money!
The Fed lends money to banks, who then give paper bills to customers through withdrawals.
In the absence of a Federal Reserve bank, another entity will be responsible for minting the currency, but the mechanism would be similar. You could even imagine a large non-government entity, like a large company, issuing coupons that serve as a form of currency, since those coupons can be exchanged for services.
This
thanks guys for all your answers, however it is still not clear to me. Let me ask it in a different way. Let us say for example the war in Syria is resolved and the country is split into two, a new country is formed in a part of the country and people agree and vote for a government. This government decides to create a new currency called XYZ. How would the process happen for XYZ bills to end up in circulation? Does this new government print bills and start buying things and if people trust the currency and accept it the money will end up in circulation? How has this happened when new countries were formed.
[video:https://www.youtube.com/watch?v=kzYx7CBv19Q]
Apologies that earlier explain was unclear. Hopefully, this video will be sufficient to clarify how money is distributed to people.
You nèed to set up a transaction so the new government has a foreign (usd) debt. And physical local notes.
1)Issue local bond
local bank buys bond. And sells a swap to usd
bank prints the local notes, pays for bond
govt repays the bond in local ccy. Swap ensures any devaluation will repay more local ccy, so reduce money suppy.