why is Fed creation of fiat money valid? some people suggest that the government prints money to pay its bills and that the increased amount of money in circulation lessens the value of $1.   i hope to get an explanation of why both assertions are false and suggest the following:
the Federal Reserve Bank (Fed) inserts money into the economy thru loans. at least two questions arise

presumably if all loans were paid back, there would be no money in circulation.   but corporations borrow money to build products and others borrow money to buy those products, hence a never ending cycle.  so Fed balance sheet every expected to
be zero (i.e. no outstanding loans)?   and what happens to the money in circulation from defaulted loans?

the &quot;value&quot; of money is presumably based on supply and demand.  this presumably counters the idea that the more money in circulation reduces its value because as the population and economy grow, there is a greater need for money, maintaining its value.   when an economy shrinks, the fed makes fewer loans and as loans are paid back, the amount of money in circulation is reduced.   further, much more money is needed in circulation today than in colonial times (as an example) simply because there is a greater population and need for money (or the economy has grown).


are these concepts correct and do they explain/justify fiat money?  what concepts are missing from a more comprehensive understanding?
If it is good for society to have stable prices then the measure of &quot;valid&quot; money is price stability. The debate over, for example, free banking laws versus central banking customs is one where both teams argue that stable prices are good and each team does not agree on the political-economic customs which would cause the good. So we see that economics involving finance relations (systems of money, credit, and debt) cannot be independent of ethical arguments in the sphere of public debate.
Regarding central bank balance sheet start with the balance sheet identity:

Assets = Liabilities + Equity

The Federal Reserve monitors the sources and uses of Reserve Balances which are liabilities on the Fed balance sheet:
https://www.federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.htm
Reserve Balances and Currency are components of the base money or monetary base which are &quot;valid&quot; means of payment because banks use Reserve Balances to clear interbank payments and society uses Currency to make withdrawals or deposits into banks and for hand-to-hand payment.
The simplified Federal Reserve balance sheet with assets on left hand side of equation:

Treasury Securities + Discount Loans = Reserve Balances + Currency + OLE

where Reserve Balances and Currency are liabilities and where OLE means Other Liabilities and Equity. Fed uses Treasury holdings and Discount Loans as control factors to (1) service the drain of Currency; and (2) provide Reserve Balances to the aggregate bank.
Service the currency drain prior to late 2008 financial crisis:

Treasury Securities = Currency

where if Fed makes its holdings of Treasury Securities approximately equal to the Currency it has provided to banks and nonbanks over the history of Fed operations then this holds Reserve Balances constant to a first case approximation. Before late 2008 there were few excess reserves in the system so Fed had to use gross and fine control over the level of Reserve Balances to enforce control over the federal funds rate.
Fine control over Reserve Balances prior to late 2008 would be accomplished by three mechanisms: (1) Discount window loans; (2) securities repurchase agreements; and (2) reverse repurchase agreements. Since the dual mandate of the Fed is to maintain price stability and employment levels it would not take loans or open market operations (security dealing) down to zero unless political unrest disrupts the nation and puts the Fed out of business as the central bank or monetary authority.

[S]ome people suggest that the government prints money to pay its bills and that the increased amount of money in circulation lessens the value of $1. i hope to get an explanation of why both assertions are false[.]

When people criticize a government for &quot;printing money&quot; this often means the central government engages in deficit spending and the central bank fails to act to curb inflation as a matter of political policy. The inflation is not &quot;caused&quot; by the central bank printing too much money it is &quot;caused&quot; by the failure of the central bank to tighten credit when the bank and nonbank sector drive inflation via too much credit expansion that uses up and makes scarce the slack or excess capacity in the economy.