Issuance of money

economic-dictionary

The issuance of money is the creation of currency so that the agents that participate in the economy (that is, the State, companies and families) can use it in their transactions.

The main purpose of currency issuance is to inject liquidity into an economy so that it can be used in business operations.

With the issuance of money, it is a question of guaranteeing its three uses: unit of account (determining the price of each thing), medium of exchange (for payments and collections) and store of value (having the coins and bills value in themselves) .

The issue of money is one of the keys to monetary policy (thus being the responsibility of the central banks), since it determines the price level and the speed of currency circulation, with strong repercussions on economic growth. In turn, the currency issued can be fiat (that is, not backed by precious metals or currencies at the issuing entity) or non-fiat (as under the gold standard).

The totality of money issued by a central bank is known as the money supply. This includes both cash (physical money made up of bills and coins) and bank money (digital annotations like the ones we see in our bank account).

It should be noted that cash can only be created by the official institution in charge of it, the central bank. Bank money, on the other hand, can be created by the same institution that makes the notes and coins, but also by private banks.

Currency issuance modalities

There are two types of currency issuance:

  • Free issuance: It was very popular during the seventeenth, eighteenth and nineteenth centuries, and it consists in that each private bank has the ability to issue its own banknotes, according to the size of its assets, that is, according to its backup capacity. Over time, this system was abandoned due to the monetary instability that it entailed and the lack of transparency of some entities, surviving in the 21st century only in some isolated cases such as Hong Kong.
  • Regulated issuance: Only the central bank has decision-making capacity on the volume of money circulating in the economy.

The issuance of money can be affected in turn by factors such as the balance of the central bank itself, since the notes and coins constitute a liability of the bank against the one that owns them. In addition, this operation does not have to be carried out directly by the central bank of the country, being able to outsource these functions (like Argentina in the 1990s).

Another option is to adopt a foreign currency as legal tender. This was done by Zimbabwe with the US dollar and the South African rand.

This type of issuance decisions can even be made subject to supranational monetary authorities. This is the case, for example, with the European System of Central Banks (ESCB), chaired by the European Central Bank (ECB).

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