How does the U.S. expand its money supply?

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This is a two-part question.

(1) Can the Federal Government pay for something (like some fighter jets) just by electronically putting appropriated "funds" into Boeing's (or some other company's) bank account, without having obtained those funds in advance from taxation or borrowing? (I'm not asking whether this is a good idea, I'm asking if this is possible)

(2) Does the Federal Reserve ever give "cash infusions" to banks by just electronically increasing their reserves, without buying back federal securities from that bank? If so, doesn't this automatically increase the value of the bank's stock, and isn't this kind of a windfall to the bank's investors? (As opposed to reducing reserve requirements, or buying federal securities from the bank, which would seem to require the bank to then engage in useful economic activity (lending) in order to benefit the shareholders?


The first question essentially asks, I think, whether the U.S. Treasury can spend money it doesn't have (i.e., can it "overdraft" its account at the Federal Reserve). When the Treasury purchases goods and services from a private business, that payment is processed by the Federal Reserve as the fiscal agent of the U.S. government. I am not aware that we have been in a scenario before where the Treasury has attempted to pay for something when it did not have adequate funds in its account with the Fed. There may be policies in place that would prevent the Treasury from doing so. However, part of the reason we have not been in this situation before, to my knowledge, is because the U.S. government has significant capacity to generate additional revenue, as needed, by selling new government securities (subject to the debt ceiling).

The second question appears to be asking whether the Federal Reserve ever donates money to banks, and the answer to this is no. The Fed works through primary dealers ( when conducting monetary policy intended to provide or remove economic accommodation and, like other institutions, assets are matched by liabilities on its balance sheet.

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Last updated on April 15, 2021