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When a private bank creates money, it obeys reserve accounting, and can't create more. But when I get paid from the state of California, it comes from their treasury account, it isn't a private bank that has a regulation or anything. What stops California from creating infinite free money from its state accounts? It's not like they open a Chase account and are limited by their balance.

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  • To answer this question, it would help if you could think through what "creating infinite free money" would actually mean - what would California actually do that would not only create this money, but also exchange it for goods and services? I think you'll find that somewhere along the way, there is either a step that is clearly federally illegal (e.g. actually printing physical dollar bills) or just wouldn't work (e.g. writing checks that people can't cash and therefore won't accept). Jan 1 at 21:10
  • For instance, say your bank account is credited with your salary. Your bank won't credit your account unless they have received the corresponding funds in some form, e.g. crediting their account at the Federal Reserve (otherwise they would be out the money when you withdraw from your account). And the Fed won't credit the bank's account without debiting another account somewhere else, so presumably California also has a Fed account. And they can't create an infinite balance in that account without the Fed's cooperation. Jan 1 at 21:19
  • This process doesn't really need any laws to enforce it; California can pretend it has money that doesn't exist, but in real life the Fed will just start denying their transfers for insufficient funds, California's treasury checks will bounce, etc. Jan 1 at 21:20
  • @NateEldredge well, the set of laws which would control this would be the ones which give the FED the control over the intrerbank ledger.
    – grovkin
    Jan 2 at 9:17

2 Answers 2

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What stops states from creating money out of thin air?

Nothing, as long as they follow the central bank's Monetary Policy of Quantitative Easing which is:

.. a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. Buying these securities adds new money to the economy, and also serves to lower interest rates by bidding up fixed-income securities. It also expands the central bank's balance sheet.

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    This might be a valid, although a very incomplete, answer had the question been about the Federal treasury. However, it's not the case for a state, such as California. An appropriate answer should describe the process by which a state treasury tracks its money and (since this is about the law) the legal authorities which control it.
    – grovkin
    Jan 1 at 13:41
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It depends in part on what you mean by "money". US $100 bills are a prime example of "money". Art 1 §10 Cl. 1 of the US Constitution says

No State shall ...coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts...

Under the constitution, only the federal government can "print money" in the "universally usable" sense. Anyone can print or otherwise "emit" objects with economic value, and such objects can be voluntarily accepted in trade. State and local governments can incur debts and thus spend money now that they do not yet have, as long as there is no legal limit on a government's ability to go into debt. California could issue IOU-bucks with the intent that a holder could redeem them as real federal money or as gold or silver at some point.

This limits the ability of a state treasury to print money, since in principle and practice it is redeemable in gold or silver. Each state has some set of laws and constitutional provisions that prevent writing rubber checks ad infinitum, for example only allowing debt for large capital projects (building) and requiring voter approval; requiring expenditures to not exceed projected revenues; granting emergency debt-mitigation powers (e.g. hiring freezes) to the governor when a state does go into unauthorized debt. In California, Art IV §12 of the state constitution requires a balanced budget, meaning that the state cannot create infinite obligations without infinite revenues.

From the legal perspective, private banks do not create money, although non-legally, people may talk about what banks do as "creating money". At that point in the discussion, we will have left law and moved to the realm of economic theory.

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  • I think the question, as I understand it, remains open. What entity (or entities) have the legal authority to determine what is the balance in California's (or any other state's) treasury? In other words, what legal mechanism prevents California's treasury from deeming to have an extra $trillion?
    – grovkin
    Jan 1 at 18:05
  • In other words, your answer points to the part of the US Constitution which limits California's authority to issue extra currency, but it doesn't explain how this limitation is enforced in practice.
    – grovkin
    Jan 1 at 18:25
  • What specifically stops it? Would the us military invade California?
    – user43328
    Jan 1 at 20:14
  • @user41572 over an accounting error?
    – grovkin
    Jan 1 at 20:52

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