Money issuance is the process of putting new money into circulation, and it is much more complex than just “printing banknotes”. There are many myths surrounding this process, especially regarding the relationship between issuance and inflation. Let’s understand how issuance actually works, what it is, and why the printing press doesn’t stop even when inflation is low.
How does money issuance work in the U.S.?
Issuance in the U.S. is controlled by the Federal Reserve (Fed). In reality, most of the issuance does not occur through the physical creation of banknotes, but through the issuance of credit. This means that money is actually created by banks issuing loans. However, most of the money issued is used to buy “obligations” of the U.S. government – Treasury bonds.
Only in special cases are other assets purchased. Thus, dollar transactions are based solely on confidence in the U.S. government and its financial system. These actions affect the liquidity of banks and thus the amount of money in circulation.
The Central Bank’s Role in Issuance
The central bank regulates the money supply through open market operations. Money issuance is an ongoing process that does not directly depend on the rate of inflation, but rather on economic policy goals and the current state of the economy.
If inflation rises, the Fed can reduce liquidity and sell bonds. The price of the securities will then fall and yields will rise. As a result, credit will become more expensive and consumers and businesses will spend less.
Credit Issuance
Loan money makes up most of the money in the economy. When a bank makes a loan, it actually “creates” money in the borrower’s accounts, and that money begins to circulate in the economy. This process greatly increases the money supply without the direct involvement of the Fed.
Why isn’t money creation always associated with inflation?
Many people think that money issuance is a direct response to rising inflation. In fact, issuance can happen all the time, regardless of inflation.
1. Issuance is not limited to the printing press.
In today’s world, much of the issuance is the creation of electronic money through the bank lending system. A bank makes a loan, and new money appears in the borrower’s account and starts working in the economy. This happens even without the physical issuance of banknotes.
2. Low Inflation and Issuance.
Issuance can continue when inflation is low. For example, when the economy is growing, new money is needed to support consumption and investment. Issuance continues even when inflation is within the target range.
3. Crises and issuance.
During economic crises, such as in 2008 or during a pandemic, the Fed increases issuance to prevent deflation and stimulate the economy. This is done regardless of the inflation rate.
What are the consequences of money issuance?
1. Inflation.
Issuing money can cause inflation if the quantity of money increases faster than the quantity of goods and services in the market.
2. Deflation.
If there is not enough money in the economy, it can lead to deflation when the prices of goods and services fall, reducing economic activity.
3. Currency debasement.
Massive issuance can devalue the currency, leading to higher prices for imported goods.
What is important to remember?
Money issuance is an important tool to regulate the economy, but its use must be balanced. An excessive increase in the money supply can lead to inflation, while a shortage of money can lead to deflation. Proper management of the money supply helps maintain economic stability and growth.
