There are three aspects to the how of money creation: the tangible, the intangible, and how money is entered into an economy. This is true whether or not the actual money token itself is tangible.

Hands on

Every type of token, tangible or not, requires some hands-on effort to create it. Physical money tokens like coins and bills incur costs for mining the metals, and turning them into coins, or creating fancy printed paper. Even creating virtual monies requires paying someone to make the keyboard entries – and then there are always overhead costs. So, it always costs money to produce money.

Roughly 3 percent of the world’s money today is tangible – a physical token of metal or paper.

Roughly 97 percent of the money in the world is a record, either digital or written, and it is created with a few strokes on a computer keyboard (or in a hand-written ledger). This ratio of cash to accounting record money is true of all the major money systems in the world today. Both cash and accounting record money have production costs.


Then, with all money, there is a nearly magical transformation from a manufactured token to a token with money value. This is true whatever the token, whether paper, gold or any other material. This magic happens when people in a community agree to use a token as money at a specific face value.

The cost of producing money – even virtual currency or commodity money – is generally less than the face value of the money unit. This is easiest to see with a paper bill. For example, a US $100 bill costs $0.13 to make. When this piece of fancy paper moves into circulation its value jumps to $100. Where does the $99.87 come from? And, who gets to pocket the difference between the manufacturing cost (13 cents) and the street value ($100)?

This difference is called seignorage, meaning the right of the lord. Historically the right to create new money belonged to the seignor, whoever ruled – the temple, church, king or lord of the manor. But the privilege of money creation can belong to a government, to institutions in the public or private sector or to individuals. This is a choice.

While it is easiest to see the difference between the manufacturing cost of money and its face value with paper money, this difference is also present with commodity money and with virtual money. When gold has been used as money, the wholesale mining costs, plus the coinage production costs have generally been less than the value of the gold as a coin.

The magic that transforms any material into money makes me think of a game used to build rapport called a trust fall. In one version, someone stands in the middle of a tight circle with their arms folded. They fall in one direction and then are pushed back upright and over toward someone else. As long as everyone participates, the person in the center will not fall. As long as everyone accepts money as money, it works great.

HOW do people enter money into an economy?

There are four general ways new money can enter an economy: giving, spending, investing, or lending. In all methods of money creation, some form of government plays a role. It may give the actual power of creation to private entities, while providing authority and trustworthiness, as do most current systems, or it may exercise the money creation power directly. Again, it is a choice. Let’s use an example and look at the various choices available for moving money into an economy.

Let’s say we have a large and robust economy that currently uses 11,293 billion units of money. We decide by the end of the coming year, we want to have 11,917 billion units of money in circulation. (How we decide on the amount of new money needed is another issue, addressed in Chapter 8.)

We decide to increase the money supply by 625 billion units – an increase of 6 percent. If we could have any money system we want, what would be our choices for putting an additional 625 billion money units into the economy?9

Gifting into the economy

New money can be gifted into an economy. If we want 625 billion additional units, here is how it we could do it.


Whoever has the power to create new money could write a check to every adult in our population (or drop the money into their bank account with an accounting entry). For example, our money creator could write a check for 2,788 units to 240 million adults (less the cost of printing and issuing the checks or making the data entries). That would add 625 billion units to the money supply and provide the most equitable distribution and diverse use of the new money. Most people would likely spend the money and it would circulate, picking winners and losers in the marketplace by consumer choice. People might pay down debt, freeing them to shift from debt service to other spending. They might put the money into long term savings, giving the banks money to invest on their behalf.

Economists refer to this method of introducing money into an economy as a helicopter drop, a term first used by 20th century economist, Milton Friedman.10 The difference between the piece of paper or accounting entry representing units of money and the value in the marketplace – so called, seignorage – would go to every adult citizen.


Whoever has the power to create new money could give it to states, by some system deemed fair to all concerned. The states could turn around and give this new money to their citizens, or they could choose another method of introducing the money into the economy, such as spending, lending, or investing. The seignorage would go to the states and their citizens.

If fairness and equity are values in the giving, then government is best able to gift new money into an economy, since it has the information and the means to make the gifts equitably to the entire population. Of course, one could give the power to create new money to a few individuals and allow them to give the new money to whomever they choose. However, that embodies a different set of values.

Spending into the economy

New money can be spent into the economy. If we want to add 625 billion units to the money supply, here is how it could be entered into the economy by spending it.

Whoever has the power to create new money, could spend this money into the economy by paying for improvements to our common wealth: cleaning up our air and water; repairing our watersheds, bridges and roads; prenatal care and family time with newborn citizens; reducing the student-to-teacher ratio in our schools or anything deemed a priority. What a lot of jobs that would create! Or whoever has the power to create new money, could spend it into the economy by buying personal yachts, vacation homes, or buy stocks, bonds and real estate.

To use the US as an example, in 2014, our federal government spent a total of $552 billion on non-defense discretionary spending, which included, in billions:

  • $24 for agriculture
  • $67 for education
  • $27 for energy
  • $80 for health and human services
  • $27 for the administration of justice
  • $18 for transportation
  • $243 for all else (includes funding for natural resources and environment; general science, space, and technology; general government; community and regional development; Social Security administration, and commerce and housing).11

If we decide to add $625 billion to our economy each year, we could almost triple the expenditures in the six major categories above. Or, for example, we could focus on one of those categories: transportation infrastructure, an area neglected over the past 50 years. The American Society of Civil Engineers has given the US a D+ for infrastructure, citing many structurally deficient bridges and potholed highways, which compromise business efficiency and individual safety. They estimate we need to spend an additional $163 billion annually over a six-year period to bring our surface transportation system up to a well-functioning standard.12

If our government had the power to create new money and decided to add $625 billion to the economy every year for the next 6 years by spending on fixing our transportation infrastructure, we could not only bring our transportation network up to well-functioning, we could take our infrastructure into a sustainable, renewable energy producing and money-saving future – high-speed cross country rail; paint city streets white in hot climes to cool and save energy; put solar panels or energy generators in highways…13

In this case, the seignorage would accrue to the public through the enhanced value of the transportation system. There would be no need to increase taxes to pay for these infrastructure improvements and no interest on debt accruing – another big bonus. And, think of the well-paying jobs this would create, again benefiting our communities as the bridge and public transit builders spent their wages!

Again, using the US and the dollar as an example, if we wanted to add $625 billion in money to the economy, what else could America choose to spend it on? Are there spending priorities that could benefit the nation as a whole? How about funding elections so special interest groups cannot buy candidates? Prenatal and childhood health care? Preschool education for all children? Higher education through graduate school? Healthcare for all? Sustainable energy initiatives? High speed national broadband? Well-funded, diverse, local public broadcasting? Space exploration?

On the other hand, we could give a select group of people the power to spend new money into the economy, with or without constraints on how they choose to spend it. We could give them the power to spend it freely, unencumbered by regulations or standards. That certainly embodies a different set of values.

Investing into the economy

New money can be invested into an economy. If we want 625 billion additional units, here is how it we could do it.

Whoever has the power to create new money could decide on technologies that they believe are important to the future – medical research and development, sustainable energy, deep sea and space exploration – then fund the long-term research and development required, and hold ownership of the proceeds in the common wealth.

In this case, the seignorage would accrue to the public through the innovations that enrich life for everyone.

Again, using the US and the dollar as an example, if we wanted to add $625 billion to the money supply, we could increase research and development dollars in our universities, freeing them to do research and development unfettered by the demands of proprietary private interests.

On the other hand, we could give a select group of people the power to created money for investment and let them choose what to develop.

Lending into the economy

Whoever has the privilege of creating the new money can lend it into the economy. This is how IOU money systems work, which are explained in Chapter 4.29–4.36. The money creator gets an IOU – a lien on future production from the borrower, and then creates new money against this IOU. Interest may or may not be charged on this loan.

If we want to add 625 billion units to the money supply, whoever has the power to create new money can pick and choose who gets to borrow 625 billion new money units. For example, if a federal government has the power to create new money, it could use a national decision-making process to determine a priority list of desired development: Say 20 percent each for Main Street small business, sustainable and clean energy, broadband infrastructure, innovative and globally competitive national manufacturing capacity, and sustainable resource management. The loans could be made to qualifying companies. Of course someone must do the tedious work of figuring out the specifics of who qualifies, and what projects get the loans. And we would want to avoid cronyism and corruption.

A cooperative membership community can create new money to be used within their co-op by making loans to members that are guaranteed by the member’s assets. This is still creating money by lending money it into a community. The Swiss WIR, a money that complements the Swiss national money, is an example of this kind of system. (It was initially named the Swiss Economic Circle – in German, Wirtschaftsring-Genossenschaft, or in short, WIR.)14

The WIR is used within a membership of businesses who agree to use it to buy and sell from each other. Systems with cooperative forms of governance, that lend money into creation, are sometimes named by the type of governance that chooses the system. For example, Bernard Lietaer, an expert on money, now at the Center for Sustainable Resource Development at the University of California, Berkeley, refers to mutual credit money systems and cooperative currencies. These descriptors focus on the type of government choosing to use the money system, not so much on how money is created or how it functions, which can be confusing.

Any kind of government with the power to create new money by lending could lend the money at nominal interest (enough to manage the loan program) to members, states and municipalities, or private banks, and the decisions on how the money is lent could be made at this community level within a priority framework, or not. As money was repaid, this money would be extinguished, requiring the government to relend the money to keep the supply stable.

Or, a government could say, “Let’s allow the private banks to create $625 billion in new money by lending it into the economy, and we’ll let bankers decide who should get it and how this new money should be invested.”

This is our current system. Our private banking sector created $625 billion in 2017, according to the records of the Federal Reserve. What did they do with it? They did with it as they pleased.

A Combination

And, of course, whoever has the power to decide how money will be created can set up a combination of giving, spending, lending, or investing. For example, if the federal government had the power to create new money, it could give it to state governments, which would then give part of it to citizens outright, spend some of it on state infrastructure, and loan some of it to private businesses. The government could also establish a primary system and complementary systems. We’ll consider this in Chapter 8.

 PrevMoney Fundamentals 3.22