<blockquote>
<p>Can the federal reserve just &quot;add zeros&quot; to a bank's balance?</p>
</blockquote>
<p>They can do that. For example, when the Fed buys government bond it does that with money that it creates electronically. For example, if Fed wants to buy US treasury for 1000 dollars, they just electronically create 1000 dollars worth of reserves to pay for the bond.</p>
<p>Also when private banks want to borrow from Fed extra reserves, Fed just creates them electronically at a keystrokes of a keyboard.</p>
<p>However, they will not do that on other account they don’t own directly. They will create the reserves on their accounts and then transfer them. But I suppose if you would want to simplify the description you could do that.</p>
<blockquote>
<p>Assuming this is possible (that the Fed can literally just &quot;add zeros&quot; to a bank's account), where does that &quot;money&quot; come from?</p>
</blockquote>
<p>From government fiat (decree) hence why it’s called fiat money. Government declares there is money so there is money. It’s an equivalent of you creating 1000 dollar dad-bucks for your kids to pay them for chores. Where the money comes from? From your decree. Other then the decree there is nothing else so many economists will also say it’s out of thin air/ex nihilo.</p>
<blockquote>
<p>Does it eventually get removed from the economy? How? Do they just delete a zero later?</p>
</blockquote>
<p>No it gets removed when the debt is repaid. For example, when private bank returns reserves to Fed money is destroyed. Likewise when government repays the debt to itself money is destroyed (since both Fed and Treasury are gov institutions Fed buying debt just means government borrows money to itself).</p>
<p>Again they don’t delete or add money to other peoples accounts they do it on their own accounting once transactions are settled. The source you cite oversimplifies it.</p>
<blockquote>
<p>And what does it mean that &quot;banks trust the government to always pay back its debts&quot; if the government (I'm assuming they mean the Fed?)</p>
</blockquote>
<p>It’s really unclear what the source means by it works only when “bank trusts the government to always pay back its debt”. That’s not correct fiat system would work even with government default. There are several countries that defaulted and that kept fiat money. See some examples in <a href="https://www.nber.org/system/files/working_papers/w13946/w13946.pdf" rel="nofollow noreferrer">Reinhart and Rogoff 2008</a>.</p>
<blockquote>
<p>are supposedly just making money out of thin air?</p>
</blockquote>
<p>It’s not just “supposedly” it’s a well known fact you can read in any macro textbook. Have look at Mankiw Macroeconomics or Blanchard et al Macroeconomics European Perspective. This is not even a secret and it’s by design.</p>
<blockquote>
<p>Wouldn't that greatly devalue the dollar?</p>
</blockquote>
<p>Not necessarily. Value of any money be it commodity money, money under gold standard, cryptocurrency etc depends on supply and demand for the money.</p>
<p>Money market equilibrium in textbook simplified model is given by:</p>
<p><span class="math-container">$$M/P=L(Y,i)$$</span></p>
<p>Where <span class="math-container">$M$</span> is money supply, <span class="math-container">$P$</span> price level and value of money is in essence <span class="math-container">$1/P$</span>, <span class="math-container">$L$</span> is the money demand that is positive function of real output of an economy <span class="math-container">$Y$</span> and negative function of interest rate <span class="math-container">$i$</span>.
Whether <span class="math-container">$P$</span> goes up and so value of money drops depends on the changes in <span class="math-container">$M$</span>, <span class="math-container">$Y$</span> and <span class="math-container">$i$</span>.</p>
<p>In addition the simple 101 textbook model is bit oversimplified as well. Some additional important factor is peoples expectations. If people expect money to be worth less next year they might become worth less due to self-fulfilling prophecy. The demand for money is also generated by some extra factors such as the fact that US government asks you to pay taxes in US dollars and also US dollars must be accepted to settle debts in US. This forces people to hold some dollars even if they would otherwise refuse to.</p>
<p>There are further nuances to it that are beyond scope of this answer.</p>

CC BY-SA 4.0
2022-05-20T18:04:34.163Z
Thanks! This was a very nice, easy to understand answer that fully covered all my questions.
Patrick Conwell
CC BY-SA 4.0
2022-05-20T16:38:36.157Z
2022-05-20T16:58:33.123Z
2022-05-20T16:58:33.123Z
1muflon1
<p>In <em>The G word</em> season 1, episode 3 the show mentions that when the government wants to stimulate the economy, it issues debt and takes that borrowed money to spend on whatever (bailouts, unemployment, etc). So far, so good.</p>
<p>However, when discussing paying back that debt (buying back the bonds) - specifically during an economic crisis - the show says:</p>
<pre><code>&quot;The government's Federal Reserve Bank simply types a couple of numbers into a computer
  and adds some zeros to the bank's balance.&quot;

&quot;What? So they create money out of nothing?&quot;

&quot;That's right. The federal government literally controls how much money there is, which 
  gives it alone, the power to bail the economy out in a crisis. And it only works because
  the banks trust the government to always pay back its debts.&quot;
</code></pre>
<p>I'm not sure what this is suppose to mean, exactly, and I cannot find any explanations that clear up the confusion. The closest I found was <a href="https://economics.stackexchange.com/questions/25454/what-does-it-mean-to-print-money">this question</a> but it only vaguely states that the Fed <em>can</em> &quot;add zeros&quot; without any further detail. Pretty much any other source online only references increasing or decreasing money supply through buying and selling bonds/debt.</p>
<p>Assuming this is possible (that the Fed can literally just &quot;add zeros&quot; to a bank's account), where does that &quot;money&quot; come from? Does it eventually get removed from the economy? How? Do they just delete a zero later?</p>
<p>And what does it mean that &quot;banks trust the government to always pay back its debts&quot; if the government (I'm assuming they mean the Fed?) are supposedly just making money out of thin air? Wouldn't that greatly devalue the dollar?</p>

CC BY-SA 4.0
2022-05-20T15:24:51.780Z
What constitutes money and whyt not. may sometimes be confusingly vague. If you take out 10,000 of credit from your bank, where does *that* money come from? The money is certainly "real" as you can actually spend it on goods, but the bank created it literally out of thin air. It is only by regulation that banks must not create *too* much money this way because they are legally required to actually "have" a certain proportion of that money. Say, if that percentage is 10%, they are allowed to give you 10,000 if I first deposit 1,000 in my savings account. *(cont'd)*
Hagen von Eitzen
CC BY-SA 4.0
2022-05-20T15:32:55.517Z
(cont) They sincerely hope that I won't withdraw these 1,000 before you have started paying back some of your debt. Now imagine that my 1,000 might be obtained from me borrowing from another bank, where some other person was kind enough to deposit 100 so that the bank could proceed ... In the end, it is all just trust-backed, not gold-backed. And governments can either literally "print" more money, or allow more money to be created by banks in terms of credits by lowering that percentage e.g. from 10% to 7%. Or decree that they have more money, but that would not be good for trust and backfire
Hagen von Eitzen
CC BY-SA 4.0
2022-05-20T15:41:47.653Z
That's fractional reserve banking - which is not what I'm talking about. As quoted in my post, the Fed's supposedly "adds some zeros to the bank's balance", which is different than adjusting the fractional reserve threshold. My question, as stated above, is specific to the Federal reserve buying back bonds it issued by simply "adding zeros" to an account. My question is not about how much fractional reserve a commercial bank can lend. Fractional reserve banking does not increase or decrease money supply, whereas the Fed "adding zeros" would obviously increase the money supply.
Patrick Conwell
<money-supply><federal-reserve>
Can the federal reserve just "add zeros" to a bank's balance?
Patrick Conwell
# Can the federal reserve just "add zeros" to a bank's balance?

(Asked by: username_0 on 2022-05-20)

In The G word season 1, episode 3 the show mentions that when the government wants to stimulate the economy, it issues debt and takes that borrowed money to spend on whatever (bailouts, unemployment, etc). So far, so good.
However, when discussing paying back that debt (buying back the bonds) - specifically during an economic crisis - the show says:
"The government's Federal Reserve Bank simply types a couple of numbers into a computer
  and adds some zeros to the bank's balance."

"What? So they create money out of nothing?"

"That's right. The federal government literally controls how much money there is, which 
  gives it alone, the power to bail the economy out in a crisis. And it only works because
  the banks trust the government to always pay back its debts."

I'm not sure what this is suppose to mean, exactly, and I cannot find any explanations that clear up the confusion. The closest I found was this question but it only vaguely states that the Fed can "add zeros" without any further detail. Pretty much any other source online only references increasing or decreasing money supply through buying and selling bonds/debt.
Assuming this is possible (that the Fed can literally just "add zeros" to a bank's account), where does that "money" come from? Does it eventually get removed from the economy? How? Do they just delete a zero later?
And what does it mean that "banks trust the government to always pay back its debts" if the government (I'm assuming they mean the Fed?) are supposedly just making money out of thin air? Wouldn't that greatly devalue the dollar?

**Tags:** money-supply, federal-reserve
> **Comments:**
> **username_1**: What constitutes money and whyt not. may sometimes be confusingly vague. If you take out 10,000 of credit from your bank, where does *that* money come from? The money is certainly "real" as you can actually spend it on goods, but the bank created it literally out of thin air. It is only by regulation that banks must not create *too* much money this way because they are legally required to actually "have" a certain proportion of that money. Say, if that percentage is 10%, they are allowed to give you 10,000 if I first deposit 1,000 in my savings account. *(cont'd)*  
> **username_1**: (cont) They sincerely hope that I won't withdraw these 1,000 before you have started paying back some of your debt. Now imagine that my 1,000 might be obtained from me borrowing from another bank, where some other person was kind enough to deposit 100 so that the bank could proceed ... In the end, it is all just trust-backed, not gold-backed. And governments can either literally "print" more money, or allow more money to be created by banks in terms of credits by lowering that percentage e.g. from 10% to 7%. Or decree that they have more money, but that would not be good for trust and backfire  
> **username_0**: That's fractional reserve banking - which is not what I'm talking about. As quoted in my post, the Fed's supposedly "adds some zeros to the bank's balance", which is different than adjusting the fractional reserve threshold. My question, as stated above, is specific to the Federal reserve buying back bonds it issued by simply "adding zeros" to an account. My question is not about how much fractional reserve a commercial bank can lend. Fractional reserve banking does not increase or decrease money supply, whereas the Fed "adding zeros" would obviously increase the money supply.  

---

## 1 answers

### Answer by username_2 on 2022-05-20. Score: 1 | Accepted answer

> Can the federal reserve just "add zeros" to a bank's balance?

They can do that. For example, when the Fed buys government bond it does that with money that it creates electronically. For example, if Fed wants to buy US treasury for 1000 dollars, they just electronically create 1000 dollars worth of reserves to pay for the bond.

Also when private banks want to borrow from Fed extra reserves, Fed just creates them electronically at a keystrokes of a keyboard.

However, they will not do that on other account they don’t own directly. They will create the reserves on their accounts and then transfer them. But I suppose if you would want to simplify the description you could do that.

> Assuming this is possible (that the Fed can literally just "add zeros" to a bank's account), where does that "money" come from?

From government fiat (decree) hence why it’s called fiat money. Government declares there is money so there is money. It’s an equivalent of you creating 1000 dollar dad-bucks for your kids to pay them for chores. Where the money comes from? From your decree. Other then the decree there is nothing else so many economists will also say it’s out of thin air/ex nihilo.

> Does it eventually get removed from the economy? How? Do they just delete a zero later?

No it gets removed when the debt is repaid. For example, when private bank returns reserves to Fed money is destroyed. Likewise when government repays the debt to itself money is destroyed (since both Fed and Treasury are gov institutions Fed buying debt just means government borrows money to itself).

Again they don’t delete or add money to other peoples accounts they do it on their own accounting once transactions are settled. The source you cite oversimplifies it.

> And what does it mean that "banks trust the government to always pay back its debts" if the government (I'm assuming they mean the Fed?)

It’s really unclear what the source means by it works only when “bank trusts the government to always pay back its debt”. That’s not correct fiat system would work even with government default. There are several countries that defaulted and that kept fiat money. See some examples in [Reinhart and Rogoff 2008](https://www.nber.org/system/files/working_papers/w13946/w13946.pdf).

> are supposedly just making money out of thin air?

It’s not just “supposedly” it’s a well known fact you can read in any macro textbook. Have look at Mankiw Macroeconomics or Blanchard et al Macroeconomics European Perspective. This is not even a secret and it’s by design.

> Wouldn't that greatly devalue the dollar?

Not necessarily. Value of any money be it commodity money, money under gold standard, cryptocurrency etc depends on supply and demand for the money.

Money market equilibrium in textbook simplified model is given by:

$$M/P=L(Y,i)$$

Where $M$ is money supply, $P$ price level and value of money is in essence $1/P$, $L$ is the money demand that is positive function of real output of an economy $Y$ and negative function of interest rate $i$.
Whether $P$ goes up and so value of money drops depends on the changes in $M$, $Y$ and $i$.

In addition the simple 101 textbook model is bit oversimplified as well. Some additional important factor is peoples expectations. If people expect money to be worth less next year they might become worth less due to self-fulfilling prophecy. The demand for money is also generated by some extra factors such as the fact that US government asks you to pay taxes in US dollars and also US dollars must be accepted to settle debts in US. This forces people to hold some dollars even if they would otherwise refuse to.

There are further nuances to it that are beyond scope of this answer.

> **Comments:**
> **username_0**: Thanks! This was a very nice, easy to understand answer that fully covered all my questions.  

---

