Money creation can be defined as the procedure through which money is created or circulated. There are two distinct methods for money creation and they are tangible production of a new monetary unit, for example, metal coins or paper currency and lending out a tangible monetary unit for a number of times.
The production of coins is carried out in a factory, which is known as a mint. This is done with the help of manufacturing metals. Bank account balances and banknotes are forms of financial securities that a bank issues.
The opposite of money creation is termed as money destruction and it happens in two distinct methods based on how the money was produced. The destruction of tangibly manufactured money happens when the coins are disposed for retrieving their valuable metal substance or while there is redemption of securities by the issuer. Money produced by loans is destroyed when the loans are repaid.
Monetary economics principally focuses on the exercises and norms of manufacturing, issuance and repurchase of money. The money creation methods influence the buying capacity of money and the functions of financial markets.
Money creation performed by mints can be categorized into the following types:
Through Competitive Minting
Competitive minting implies that the commercial operations of producing coins are widely open for a large number of contending producers. Here bullion is purchased by the mints from the bullion market and they convert them into coins. These coins are utilized for the payment of the bullion and associated manufacturing expenses, as well as to render a profit.
Through Nationalized Minting with a right to exchange
Nationalized minting implies that the government enjoys a monopoly over the coin minting business and also the government regulates all the mints that manufacture a countrywide coinage system. According to a bimetallic or metallic benchmark with the mint of a country, people generally enjoy the opportunity to take valuable metal to the national mint and get it minted at a particular discount. The discount is termed as seigniorage.
Through Nationalized Minting without right to exchange
In case there is no legitimate option for bringing valuable metal to the national mint and getting them minted into a specific coin, the issue of the coin is dependent on the mint policy or government policy. This may lead to arbitrary coinage debasement in which case the mint under the government re-produces coins with a smaller metal value as a means for raising finance. Nevertheless, it allows a number of highly complicated coinage systems, for example the composite legal tender system (the combination of limited legal tender and unlimited legal tender).
Money creation can also be performed with the help of fractional reserve banking. The fractional reserve banking deals with two types of money, bank notes and bank account balances. The banks issuing bank notes are termed as banks of issue. A money multiplier is the most fundamental procedure for generating money.
Last Updated on : 1st July 2013