The monetary creation is the operation of creation, within a country, of Monnaie. Since Antiquity, monetary creation is primarily the fact of the governments, which sometimes deceived them and caused elevated levels of Inflation.
In parallel, the States fight against the Faux-monnayeurs which grow rich by manufacturing counterfeit money.
By the monetary authorities
See also: Monetary authorities
The financial authorities are not the principal primary education creators of currency, but they exert a supervision on this creation, incumbent with the Banques (see below). In addition the public budgets can have an indirect incidence on the request for currency.
Formerly, the monetary institutions concerned directly the executive power. The creation of the currency and the monetary policy concerned directly the government, these prerogatives being comparable with a regality. Nowadays, the financial authorities are incarnated by the central banks. These last are autonomous with respect to the political executive in some developed Pays (EDF, Banque of England, ECB, BoJ,…).
The monetary authorities have like first vocation “to guarantee” (with the illustrated direction) the value of the currency, in other words, the “confidence” carried by the carriers and holders (potential) of currency towards the aforementioned currency. Term “to guarantee” revêt also direction clean, that it is in the system of the Gold Standard (the gold reserves held by a Central Bank were the “proof” that monetary confidence was founded) or, in the modern system, by a central bank praetor in last spring.
The second vocation of a monetary authority is to create (even to destroy) currency (coins and tickets for example, but actually, a simple dummy entry can make it possible to create currency). However, the creation of new currency can have an direct impact on the Inflation. A rise in inflation is generally regarded as harmful (see Conséquences of inflation).
Regulation of the creation of representative money
According to an evolution started in the Years 1930, and reinforced in the Years 1970 and 80, the central banks create only the fiduciary Monnaie. The function of creation of the Representative money (currency of credit) is delegated to the finance companies, called “second-rate”. However, the central banks supervise and control the whole of monetary creation:
by playing on the directing Rates: the finance companies, to obtain Liquidities, borrow on the interbank Marché or borrow from the central banks with an interest rate defined by the central bank, the Taux of refinancing the Monnaie central bank which they need. The rate of loan (the Eonia for example) on the interbank market is very close, but slightly higher, of the rate of the central bank. While increasing (or while dropping) its interest rates, the central bank makes more difficult (or facilitates in the event of fall) the investments, a rise of interest rate implying an increase in the cost of a credit for the borrower (household or company). So a rise of interest rate involves (All things being equal) a fall of application for credit.
- while varying the ratio of obligatory Reserves of the finance companies: those are obliged to place on a deposit account near the central bank of the liquidities whose value is proportional to the whole of the appropriations that the central bank granted. A rise of this ratio increases the cost for the trade banks to emit appropriations, and thus reduced their emissions of credit.
by imposing rules on the whole of the Banks, so that these last present guarantees taking into consideration risk which they take (see Banque - role and directives Basle II in particular). Indeed, if a bank commercial takes too many risks in the granted loans, it is likely to meet non-payments on behalf of its borrowers, and then drastiquement to restrict the loans granted to other economic actors. There is then a risk of Credit crunch.
Nowadays, the authorities are brought to manage the monetary creation according to the abundance or of the scarcity of the liquidities, in order to avoid phenomena of important corrections likely to generate serious attacks (too many liquidities creates bubbles on certain markets. ex: purse, market of the real estate, market of art etc…). They aim to support the growth without excessive inflation (the target of the ECB is today an inflation of the prices of 2% in the euro area). The central banks limit on average over long period the creation of currency m2 to the growth of GDP.
In conclusion, the financial authorities have a key role: they must guarantee the value of the currency in circulation. “To exploit the currency” can be regarded as a dangerous and hazardous play: the economic variables are intrinsically dependant (growth, use, purchasing power,…) and there does not exist any magic formula. The phenomena of inflation and deflation have an important effect of correction, which, brutal can generate serious and prolonged crises (see central bank, case of deflation in Japan for example).
In fact besides there the essential reasons led many Nations to grant an independence to the Central banks, so that the currency is relative safe from dangerous political decisions, too carried on the monetary play.
By the banks
A commercial bank creates currency at the moment when it concluded a trust deed with a borrower. The bank then credits the account with the borrower of a certain amount of money in exchange of a credit. The currency is destroyed (flow of the account) when the lent sum is refunded at the bank. This destruction of the currency results from the contractual nature of the currency. Indeed a contract concluded with oneself is null, because it does not engage anybody.
The value of the credits had by the bank is its principal credit. The value of a currency is founded mainly on the value of the credits had by the bank. The modern currencies are called " currencies of crédit". One can also speak about " currency of créances". The doubtful debts are the credits that the bank fears to be able to recover. The doubtful debts reduce the profit of the banking institutions.
In practice the currency is continuously created by the banks: any title which represents a quantity of currency is itself of the currency, which can be used for all the uses of the currency, including that to be used as Caution for a new title, etc the only limit is that at each stage, one must preserve a confidence in the possibility of finding the initial currency: this confidence is proven by the fact that constantly conversion is possible in the agent.
It is of this completely obvious fact that this currency created by a first bank can be found in one or more other banks, increasing by this fact the capacity of the other banks to create in their turn of the currency; it is the Multiplier effect of the credit, and which makes say that “the whole of the private banking system is creator of currency ex-nihilo”. In fact, the currency of credit (temporary), represents in France more than six times the permanent currency (coins and tickets).
Time of the Gold Standard
Time of the Gold Standard, the mechanism was the following:
If 100 people deposit gold in a Banque, because it is more practical to make use of accounts - checks and that in more the bank remunerates the deposit, the bank notes quickly that it has need to constantly preserve only one fraction of gold (for example that of 8 people), and can lend ( credit money ) the remainder against guarantee and remuneration. Thus, are in circulation 92% of initial gold, and the titles which account for 100% of this gold: the quantity of currency was practically doubled. Moreover, the gold given in circulation can even return to him in the trunks of the bank, and be used to supply the mechanism: with final 12,5 times (100/8) will circulate the initial quantity of gold. The bank can not even need not to withdraw gold, and to make the loan by a simple dummy entry: it “credits” the account with its debtor, to which it grants faculty to emit accounts - checks beyond its initial deposit, with the banker's guarantee.
The currency is completely dematerialized and the banks create the currency on the basis of their “equity” and on the value of their credits. The Central Bank has the role first of ensuring the solidity of the system, in:
- controlling this monetary creation carried out by banks (imposition of ratio of risks, etc);
- and while being lender in last spring , which de facto guarantees all “Banque of deposit” against a panic which would push its depositors to withdraw their assets at the same time all (it is enough in Central Bank to make a temporary loan, time that the savers return to place their economies in the first bank or another).
By individualsWhen the currency consists of goods whose value is recognized without a particular authority imposing it, it perhaps emitted by no matter whom. It was probably the case in the first time (Antiquity), that was it afterwards in certain circumstances (Gold rush).
But the possibilities that the capacity gives “to beat currency”, in particular handling of value and implicit taxation that represents, quickly led the political authorities to reserve the monetary emission and to fight against the Faux-monnayage.
By the civil society
Analysts mainly, altermondialists and Néo-keynésien S, think aujourdhui which the fact that the States do not practice more monetary creation as means of financing of their expenditure them led to resort to the loan and to increase their debt, and is at the origin of the debt and the endemic economic problems of these States.
Notes and references of the article
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