Lesson 4a: How Money Is Created and Circulated in the United States
Students will be able to explain how money is created and circulated in the U.S.
Jump$tart Standard: There are no applicable Jump$tart standards
SEL Competency: Social awareness
Introduction and Materials (2 min)
Say: We are going to watch an information-packed video today where I want you to try to answer as many questions as you can as we watch. The guide will help you with the activity of learning how money is printed and circulated—and it’s fascinating and terrifying!
Video (25 minutes)
(pull video up: https://www.youtube.com/watch?v=mzoX7zEZ6h4 and stop at 24:17)
Pass out the video guide
Answers to video guide below
Full Video Guide for How is Money Created?:
(stop at 24:17)
- Who prints the United States’ physical money?
- The central bank, a.k.a. Federal Reserve System
Chapter 1: Physical Money By The Government
- Who controls money?
- The government
- What forms does money come in?
- Paper money and coins
- What fraction do the forms of money mentioned above make up in the economy?
- How much does it cost to print a $10 bill? And how much does the government profit from printing the money?
- $0.03 cents to make, government profits $9.97.
- What is seigniorage?
- Seigniorage is the difference between the face value of money (e.g., $10 bill) and the cost to produce it (e.g.,$0.03)
- For thousands of years, what was the measuring stick of value?
- What changed the backing of currency and gold?
- The end of the gold standard in 1971
Chapter 2: Private Banks and Debt-based Money
- Where is the vast amount of money created?
- The private banking sector
- What is a bank run?
- When depositors go to pick up their money all at once, but the banks don’t have it
- What is a promissory note?
- A piece of paper promising to pay something back
- How do banks create money?
- Banks can create and distribute debt. For example, when a person goes to the bank to borrow money for a loan on a house (mortgage), the bank creates the debt (a.k.a. money). The borrower then buys the home with the debt and the home seller can buy other things with the money paid for the house. When the bank issues a loan, they type the amount into a computer and it becomes a digital representation of money.
- How do banks gamble with your money?
- Fractional reserve lending, where banks keep 10% of the money you deposit and loan out the rest.
- What occurred in March 2020 at the Federal Reserve?
- The Federal Reserve eliminated fractional reserve banking, so banks don’t have to hold any of the money a person deposits; they can lend it all out to someone else.
- What is the result of lower interest rates for people?
- People are taking out loans for practically 0%, so money is being created out of debt.
- What are the two major ways governments raise money?
- Taxation and trade
Chapter 3: Central Banks
- What is quantitative easing?
- QE is when a central bank creates money in order to issue loans directly to the banking sector, large corporations, and the public—basically flooding money into the economy. Example: The 2008 $700 billion dollar bailout of Wall Street, which the public then had to pay off
- What enables the wedge between the “haves” and “have nots” (a.k.a. wealth inequality)?
- The Federal Reserve monetizing the U.S. debt enables wealth inequality to grow.
- How does money enter the system?
- Central banks use their “magic” money to buy bonds from the government. They do this through the bond market, which exists to lend money to corporations or governments.
- What is a bond?
- Debt issued by a government or corporation. Central banks, which have no savings, create money to buy these bonds.
- Can a central bank go bankrupt?
- No, because they can create more money.
- Why are governments stuck between a rock and a hard place?
- They can’t raise money without raising taxes, but owe trillions to central banks. The hope is that the borrowed money can kickstart the economy.
- Why does the central bank own so much?
- When central banks buy bonds given by the government or corporations, they can end up owning a lot of the assets. They can print more money, not go bankrupt, and buy real assets like stocks and real estate.
- What are the consequences of creating money out of nothing?
- Removing stock markets from reality/distorting the actual price of stocks. The stock market used to reflect the economy, but not anymore. The stock market has become twice as big as the entire nation’s GDP, which doesn’t make any sense.
- How is it possible that 30 million Americans became unemployed in the United States in April 2020, but the stock market had its best month since 1987?
- Central banks printed trillions and gave it to banks and hedge funds, which were put into the stock market.
- How have we seen inflation?
- Housing market and stock market
- How do the rich get richer and the poor get poorer, according to the video?
- Printed money ends up in assets, pushing up the prices, so the few people who own large amounts of stock end up wealthy, while there is no growth in the actual economy.
- What do the three charts show you?
- The stock market became glued to the Federal Reserve in 1980. The more money they printed, the higher the stock market went up, thus making the people who have the most stocks extremely wealthy.
Discussion of Video (10 min)
Ask: Are there any questions you didn’t get answered in the video?
Go over the answers together.
Money Circulation Activity (15 min)
Say: Now we are going to match the statements with the blank labels in this chart. See if you can utilize your video guide to help determine where everything fits in the circulation of money.
Pass out activity worksheet.
Homework (3 min)
Say: There was a lot of information presented in that video. For homework tonight, I want you to choose one of the questions on the homework worksheet to take a deep dive into and answer. If you have other questions, there is a place to come up with your own question to research and answer. One resource has been provided for each question to help you jump-start your answer.