How Does The Government Expand The Money Supply

Understanding the Money Supply Increase in the U.S. and its Potential Consequences

By Edmund C. Moy

As a result of fighting the recession caused by the COVID pandemic, the U.S. government has flooded the American economy with a historic amount of U.S. dollars created through unprecedented monetary (and fiscal) stimulus programs.

Both the policy makers at White House and the Federal Reserve believe that it is better to err on the side of doing too much than too little when it comes to making sure the economy recovers and thrives.

But what will be the likely consequences, both intended and unintended? And should a Christian care?

The Federal Reserve is responsible for monetary policy, which means managing the money supply and credit conditions to attain three goals: maximum employment, stable prices (measured by a modest amount of inflation), and moderate long term interest rates.

This is accomplished by determining interest rates, regulating bank reserve requirements, managing the supply of circulating coins and notes, and the buying and selling of U.S. government securities ("quantitative easing").

Our nation's current monetary policy is expansionary, which means artificially increasing the money supply and lowering interest rates to near zero. As a result, the growth rate of all the dollars in circulation ("M2 Money Supply") soared a historic record 27% in 2020-2021.

To put that in perspective, that is the biggest jump in the money supply in America's history. That is bigger than the Financial Crisis of 2007-2008 (10%), bigger than World War II (18%), and bigger than FDR's stimulus to fight the Great Depression (10%).

This is important because the supply of money plays a key role in a nation's economic prosperity.

Back in the days of the gold standard, money supply was limited to the gold in circulation and the gold reserves the government or banks had to back the number of dollars it printed. In times of economic distress, the inability of the government to expand the money supply led to bank runs and failures, and limited resources to stimulate the economy.

When the gold standard ended, the U.S. dollar was no longer backed by gold. Its value is determined by the market and the law. The market value comes from the supply and demand of the dollar relative to all the other sovereign nation currencies. The legal value comes from laws that force citizens to accept dollars as legal tender, also known as fiat currency.

The advantage of fiat currency is that it is much easier for the Fed to manage the money supply. For example, during the Financial Crisis of 2007-2008, near zero interest rates and four rounds of quantitative easing provided much needed liquidity to banks strapped by calls on bad bets on subprime mortgage derivatives.

But printing too much money can also be bad. Most importantly, it raises the risks of inflation, like Venezuela's current inflation rate of 15,000%.

American markets are currently signaling significant inflation fears, noting that the classic formula for aggressive inflation is when excess money supply meets the increasing velocity of money resulting from a robust recovery.

The Fed would likely raise interest rates to combat this aggressive inflation, which would in turn, ultimately raise the federal government's borrowing costs. As the amount of federal debt dramatically increases coupled with higher costs to service that debt, it is sure to wreak havoc on the federal budget.
Too much money can also have other unintended consequences like overvalued asset prices or increasing tolerance for greater risk in search of returns. And banks are disproportionately lending to large creditworthy businesses instead of small local and family run businesses, and many of those loans have been used to reduce debt or buy back stock instead of supporting jobs.

Is there a spiritual dimension to monetary policy?

As a Christian and someone who has served our country in both The White House and as Director of the United States Mint, I believe that God cares deeply about money. It is a measure of stewardship, an opportunity to commune with God as we strive with Him to co-labor in creation, and an administration of common grace through government for the flourishing of a people and nation. The size of our money supply does matter and should matter to Christians.

Ed Moy Edmund C. Moy was the Director of the United States Mint from 2006-2011. From 2001-2006 he served as a special assistant to President George W. Bush for presidential personnel at the White House. He has been a guest speaker for FPE at a campus event and in our Faith in the Capitol House course.