My son and I are trying to do some research for his homework and can't answer the question, "How is money supplied in the United States?" We know that the US mint literally makes the money, but where does the actual supply of money come from? I understand that our system runs on loans and interest, but again, where does the supply of the money for these come from?

collect

Lots to this answer from my old economics class . Historically (after the days of the "private bank notes" which represented the obligation of a bank to redeem the note), the US ran on the "Gold Standard" -- that is, US government notes (which are part of the government "debt") were backed by gold. These gold certificates had a yellow seal on them. Additionally, there were "Silver Certificates" (blue seal) backed by silver, and "United States Notes" which were not backed by anything in particular. And there were "Federal Reserve Notes" (green seal) which had the names of individual banks! You can still occasionally find those "red seal" United States notes". Now you will mainly find "Federal Reserve Notes" which are debts of the Federal Reserve Banks (which are technically independent of the government). These notes are technically balanced by deposits held by the Federal Reserve Banks, though there is no absolute reason preventing them printing an excess. In short the ten dollar bill in your hand is precisely backed by .... a ten dollar bill. May 10 07, 4:26 PM

lanfranco

This site may help, particularly the "Central Bank" section. Some of the terms and issues described are complex, but there are many links. Together, they can help you put together a picture. http://en.wikipedia.org/wiki/Money_supply May 10 07, 4:32 PM

Baloo55th

Technically, the money issued is a representation of the gold that the government has in store. (Hence on Bank of England notes 'I promise to pay...' - just try to collect it!). Money is only a substitution for goods and services, backed by an administration. This administration is usually nowadays a government or a national central bank (more or less the same thing) but can be commercial banks (as in Scotland for notes). When the government burns old notes, they're not losing money by it. When they hold it, it's not worth anything especial as they can print new to replace it. It's worth value to you, as you can't. (Not legally, anyway!) All money only holds value while people believe in it. Even gold. When some modern alchemist manages to transmute lead into gold economically, it'll kill the gold market. (Philosopher's) Stone dead. Once, the money in circulation was actually backed dollar for dollar by gold. Now, most of the money is electrical - credit cards, BAC transfers and so on - and not even paper. A government can put more money into circulation by either issuing notes (like Germany did in the early 20s - and look what happened there!) or by spending it on services - as FDR did in the New Deal (which did work in the main). Money transfers between countries as interest rates change. If a government puts up interest rates, money flows in, but local industry and commerce suffers. And vice versa. Most of it is an illusion, and as I said, a matter of belief. May 10 07, 4:34 PM