What would happen if the US Federal Reserve stopped printing money?

Question

So much money is digital now, from bank accounts, online stores, credit cards, and so on.

How long would the country be able to sustain itself if we didn't introduce new paper currency/coins into the market and just kept old bills?

Answer 1

If the Fed just stopped printing physical money, private entities would step in to replace the bills as they wear out. Perhaps a large private bank would issue notes redeemable by the bearer for electronic money. Maybe a new technology (anonymous smartcards, or cellphone-based payments) would gain significant share. This assuming the Fed still supported digital money in the same way they do now.

If the Fed changed monetary policy (e.g. stopped injecting any new money into the system), the effects would depend on the exact change. Generally, if supply of money went down, value would go up. Since economy is usually expanding (more goods and services being produced), prices would fall so there would be deflation (more goods trading, same amount of currency). If government-backed currency were abolished altogether, some other unit would replace it. Quite likely, foreign currencies would gain more widespread use (as they do in failed states).

The disadvantage of alternative schemes is that they are as strong as the institutions backing them. We've seen how even the biggest banks can go bust quickly. Private notes or foreign currency would not be legal tender (i.e. merchants could refuse them legally, but they cannot refuse cash). Transaction costs would be higher, as everybody would need to think about and compensate the risk of accepting the specific mode of payment.

Answer 2

The US Government doesn't print money -- the central bank (aka Federal Reserve) does. If the Fed stopped printing money, the US Treasury would issue treasury notes again. Rates would spike rise quickly as the supply of money tightened.

If your scenario includes the Treasury not printing money anymore, you'd have a situation similar the US situation in the 19th century. Banks would issue notes payable on demand tied to some store of value. You would have chaos for awhile, probably followed by a bi-metallic gold/silver policy. Distance from the bank would likely dilute the value of cash transactions. If you didn't diversify your cash wealth into notes from various banks or "hard cash" commodities, you would be vulnerable to losing anything due to collapse of a bank.

The US has been heavily subsiding mortgages for over 30 years by pumping lots of borrowed/printed money into banks. Once the spigot of money shut down, you would see a spike of interest rates and a big drop in home values and a implosion in the value of commercial developments that depend on tax and cheap money policies. (ie. big box, malls, suburban office parks)

Answer 3

The average life span of a dollar bill is under two years. Dollar coins are more durable, but they seem to be going over like lead balloons now.

It would make things more inefficient, that's for sure. When it comes to making transactions, it doesn't get any easier than a common currency.

Not everyone has a bank account or a means to make electronic transactions. Those people would become poorer as a result.

But mentioning "Federal Reserve" and "stop printing money" in the same breath is more than a little comical.

Answer 4

The free market is perfectly capable of creating currencies. It usually creates more than one. When this country first began - and the government did not have a monopoly on currency creation - there were many items being used as currency: gold, silver, corn, wheat, tobacco, rice, etc..

The US constitution attempted to outlaw paper money since the colonies had issued many types of paper money (i.e. bills of credit) and once they started printing the paper money they just couldn't stop themselves.