THE PRINTING OF MONEY has always been a topical issue when discussing the economy.
In recent times, it has become even more of a talking point with former Prime Minister Owen Arthur decrying the Central Bank’s printing of money to prop up the Government.
But, exactly what does the term “printing of money” mean?
University of the West Indies Economics Professor Winston Moore offered this explanation.
THERE ARE TWO main definitions that I think people should be cognisant of and the first one is just the basic definition and this hardly occurs in practice, but money creation occurs when the Central Bank and the Government – commonly referred to as the monetary authorities – essentially just physically print more money.
In most instances it is normally very small because the Central Bank only prints additional dollars to account for any loss, say for example, money is destroyed or gets damaged in any way and the Central Bank wants to keep the money looking fresh and new, they will refresh the currency. But usually the new notes and coins printed is equal to the amount that they have taken out. That portion of money creation is normally very small.
The second situation is when Government borrows money from the Central Bank. Once the Government borrows money from the Central Bank by issuing a cheque, that money is used to pay for goods and services and it goes on to the books of commercial banks. Once it goes on to their books, they can then use that money to lend to their customers and by doing so they create additional money flows into the financial system.
While the first two scenarios are pretty straightforward, the third scenario is the one which we have been experiencing in recent months. It’s a little bit different and specific to our case now.
During any given week, the Central Bank issues treasury bills to finance its activities. They may also issue saving bonds, debentures and those kinds of things. Those pieces of Government paper are used to finance state activity such as the purchase of medicines, the purchase of construction materials, to repair roads, etc.
So if Government paper is not taken up by commercial banks, individuals, the National Insurance Scheme (NIS) and so on, that means the Government can’t pay its bills, can’t pay wages, can’t buy goods and services.
So in that instance the Central Bank has one of two choices; the Central Bank and the governor can tell Government that the auction has not been fully subscribed and therefore there is a gap in the amount of money which they expected to get from the auction and that’s the end of it. But in recent times, the commercial banks are holding Government’s liquidity at the Central Bank.
The Central Bank has a lot of funds which it has been able to use to then make up for any of these auctions which were not fully subscribed.
So essentially, if there is a Treasury Bill auction, the Central Bank could use the excess liquidity of the banking system and use the commercial bank’s liquid assets to sort of make up for the shortfall in the Treasury Bill auction.
So it therefore guarantees that Government gets all of the money it was expecting from any given auction and through that, it is a form of money creation, because the commercial banks were holding those deposits on the books at the Central Bank and because of that it was not entering the financial system.
What the Central Bank has now done because it has purchased those pieces of Government paper, it has transferred those funds that were not being utilised in the financial system into the financial system, because Government would then use those funds to purchase goods and services and other assets. That is the most recent type of money creation which has been occurring in Barbados.
What is important but hasn’t emerged in the discussion though is that money creation mostly occurs when those funds get into the financial system, where commercial banks can start using those funds to lend. But, most commercial banks haven’t been using the funds to lend, they have just been accumulating additional liquid assets at the Central Bank because of the uncertainty of the economy. So, the amount of money creation taking place is not as much as we would have expected if the Central Bank was doing that kind of activity in normal situations.
