6. Emission mechanism – important as part of the monetary system, monetary and economic policy and of the different operations that may mean financial repression
Prof. dr Stanko Radmilović
At the beginning of this article we have to say that the readers, in order to obtain more comprehensive information about what is actually happening in the World of money and finance, can expect not only broader, but also a more complex elaboration about its creation, the one that is presented in the article “The initial explanation of money creation - opens the door to uncovering its mystery and virtuality.” Generally it is not excluded that there will be those who will stand on the notion that it is inappropriate and that the emission of money is no longer a highly topical issue, pointing to the arguments that, in a sense, "are true, but not the whole truth ". For example, stating that the issue of money creation and the monetary system as a whole is not as current as it used to be, and according to many the same goes for monetary policy, the following theses and reasons are mentioned:
(1) "The bogeyman" of (hyper)inflation has been globally overcome and the situation today is quite different from that in the larger part of the second half of the twentieth century. In other words, many will insist that, already at the end of the twentieth century, especially in the current period, financial instability (anyhow we define it) and the financial domain in general (that is, how the money is used), have become a more acute problem than the monetary, price instability, then inflation;
(2) from this fact, can be drawn consequential thesis, which reduce actuality and importance of money emission;
(3) or, in other words, a conclusion is drawn that the focus is not any more on the activities related to the existence, disruption of equilibrium and restoration of macro-monetary balance of supply of (Ms) and demand money (Md) - which means the mechanisms and policies of issuing money – but this place being taken over by finance, financial system, financial (in)stability. Or, to put it differently, or even more clearly: in the foreground, there is an outbreak of incredible expansion of modalities of use of money and a number of implications that arise from these modalities.
As we said it earlier, it is the truth, but not the whole truth. Namely, we have to bear in mind what we have also said before.
Firstly, that in the financial system (again – whatever that might mean) that many, impressed by its development, euphorically call the financial industry, money plays the role of the basic raw material, therefore, a logical conclusion can be drawn that correct reasoning would not be that the financial system, i.e. the way of money usige expands in every way (not to mention explodes) and that the importance of money, the currentness of this substrate of finances, could be drastically reduced. Empiric facts will show us later that the money supply (Ms) has been increased also depending on the trends and size of GDP, which seems logical; but also that the money growth rate, the growth rate of narrow money (M1), considerably greater in correlation with the mentioned inflation rates, which does not seem significant, at least not in terms of the neo-quantitative money theory.
Secondly, equally significant is the fact that with fast and great growth of the financial system (way of money using), have increased the importance of the process of money creation (in the issuing mechanism) and the maintin its traditional macroeconomic function – carrying out the monetary policy in order to maintain price stability.
Along with the previous two current issues, another one has to be added today. It manifests through extraordinarily high involvement in the emission mechanism and in the mechanism of monetary regulation - instruments that have traditionally been understood as those belonging to either real economy or to the financial system. This does not mean anything else than that we are witnessing a mix of development in the money domain: on the one hand the financial sphere (the sphere of money using), with its growing importance of authenticity, which means increasing the bifurcation in relation to the monetary domain (the emission of money and monetary regulation), but we are, on the other hand, witnessing amplification of the symbiosis between the monetary and the financial sphere, which is reflected, among other things, in the fact that monetary regulation is achieved through financial instruments: interest rates, securities, operations in the financial markets, supervision that is (mostly ) located in a par excellence monetary institution of the central bank ...
Therefore: (1) however true it is that with its growth (which many call the financial revolution) the financial system gained in importance, it is also true that money alone as a substrate of the financial system, has not lost its importance, and (2) as a consequence of the development of the financial system big changes have taken place in the process of making money (i.e. in the emission mechanism) as well as in the manner of implementation of the traditional functions of the monetary policy - to maintain the monetary (price) stability.
So that all of this could be understood and applied in practice it is necessary to – legally speaking - from considerations of principle which we have already stated in the article “The initial explanation of money creation already - opens the door to uncovering its mystery and virtuality”, move "to review in detail." Some might prefer to express themselves in terms of the traditional divisions and to formulate this need in the manner that we are facing a more detailed consideration of the monetary-system domains (emission mechanism), and then the monetary-politicy.
However, such a division - in terms of a strict differentiation between the monetary system and monetary policy - is problematic because today, we believe, better than before, that the implementation of the monetary policy begins in the emission mechanism (selection of emission channels and instruments that are not monetary-politically neutral). This, in other words, means that the once preferred assertion that the role of the monetary policy to control the value of money only by regulating the amount of it (independent of its emission), i.e. inflation, does not “hold water” any more.
The purpose of the presentation in the article “The initial explanation of money creation already - opens the door to uncovering its mystery and virtuality”, was with a limited aim – to lead us into the World of money and finance and in this way to emphasize two key facts: that money is a transferable claim from banks and that it (the claim) is created from nothing, ex nihilo. To obtain more complete knowledge (picture)