How Public Spending Creates Money
Our Government is a Currency Issuer
Because our federal government is a currency issuer, it does not need revenue from taxes or bonds in order to spend. Therefore, the way of understanding public spending, which offers the greatest clarity, is that whenever the federal government spends, it effectively creates the money it uses to pay the recipients of its spending. At the simplest and most superficial level, the government spends the money into existence by writing a check to the recipient. When the recipient deposits or cashes the check, the Federal Reserve makes sure the check clears. For beginner purposes it is that simple.
There are deeper and more complicated layers to this process, entailing somewhat convoluted balance sheet operations, which are shaped by our gold standard history and are due for an update in order to simplify the mechanics of the process. However, we will focus on a simple, straightforward way of understanding the monetary system without getting hung up on the detailed mechanics.
How the Fed Creates Money
In this video, former Fed Chair Ben Bernanke describes the Fed’s ability to create money. This ability implies that the government does not actually need tax or bond revenue in order to spend.
For the mechanics of money creation and a guide on how to understand it, go to Money Creation Through Public Spending