Currency Issuance

Currency issuance refers to a mechanism through which the monetary authority, usually a country's central bank, prints new banknotes and releases fresh coins to increase the money supply in the market. The central bank is an independent organization that governs an economy's monetary policy decisions.

The primary motive of the monetary authority issuing currency is to ensure economic stability and growth by implementing expansionary monetary policy to increase consumers' purchasing power. The central bank also aims to reduce the impact of market fluctuations on the currency value in the foreign exchange market. Further, the central bank distributes the currency through commercial banks.

Currency issuance is a macroeconomic measure through which the central bank prints banknotes and mints coins to enhance the monetary supply and circulation in the economy. The central bank or the monetary authority has the right to issue new currency to bring economic stability and growth over time. Usually, it makes such decisions independently; however, in certain nations, such decisions are taken on behalf of the government. Indeed, the government appoints the central bank governor in many states.

Governments and monetary authorities prioritize currency issuance and 

management since they are based on regulating economic conditions and ensuring stability within the country. Moreover, a nation's economic strength is determined by the value of its currency in the international market, and the issuance of currency facilitates the central bank to attain exchange rate stability in the forex market. However, the central bank often makes such decisions based on its monetary policy agenda. Also, if the monetary authority aims to bring economic stability through the printing of new currency, it does so together with other policy measures for a comprehensive impact.

The history of U.S. currency issuance can be traced back to the USA's early colonial era when currencies like English, Spanish, and French money were in circulation. With the onset of the Revolutionary War in 1775, the Continental Congress was responsible for the issuance of "Continental Currency" for fund-to-funders. Nevertheless, this currency lost value quickly, earning the title "not worth a Continental."

Then, the Mint Act was passed in 1792, and the dollar became the first and primary currency of the nation, promoting a decimal-based currency system. The first U.S. coins were minted and circulated in 1793. However, the government released its first paper money in 1861, but the "Treasury notes" were issued before that to deal with the financial crisis. Between 1793 and 1861, approximately 1,600 private banks issued their own paper currency, propelling around 7,000 different "state bank notes." Also, during the Civil War, the government issued "demand notes" or "greenbacks," followed by the United States notes. Further, the government released "Silver certificates" from 1878 to 1923 to facilitate transactions through the exchange of heavy silver coins.

With the formation of the National Bank Act of 1863 and 1864, the banks could issue standardized currency approved by the government, I.e., "national bank note." Then, in 1913, the Federal Reserve System was formed under the Federal Reserve Act, which in 1914 became the authorized body for issuing Federal Reserve notes in the U.S. until today.

The central bank is empowered to make monetary policy decisions in a country, independently or on behalf of the government, as stated in the jurisdiction. Let us now understand the purpose behind the issuance of currency in an economy:

1. Increase Money Supply: The primary aim of issuing currency is to enhance the money supply and circulation in the economy as a part of monetary policy intervention.
2. Ensure Economic Growth: Another critical objective of such measures is to foster economic growth and stability by stimulating the production and consumption of goods and services.
3. Stabilize Exchange Rates: By taking such measures, the central bank can control the devaluation of the country's currency during market fluctuations.
4. Transfer of Funds: The nations can ensure the movement of money from states to the central government and vice versa for funding projects in favor of public services.

Currency issuance is a macroeconomic measure, and the central bank aims to induce money into the system. Let us gauge the need for issuing currency through the examples below:

Example #1

Suppose a nation has been going through an economic slowdown phase, where businesses are experiencing survival issues, people are saving more and spending less, and employees are being laid off. Therefore, to boost economic growth, the central bank decided to print new banknotes, which will be circulated through financial institutions like commercial banks among the public. This measure was taken alongside other policy-easing measures like lowering interest rates to encourage people to spend more and save less. Thus, the monetary policy decision helped the central bank and the government improve the country's economic conditions by accelerating consumption, production, employment, and GDP.

Example #2

Former U.S. President Donald Trump promised to eliminate the issuance of federal digital currency, as he considers it to be a severe threat to individual liberty. During a rally in New Hampshire, Trump expressed his views on such currency, which would destroy the American's freedom as the Federal government could exert complete control over their finances. Meanwhile, Trump's opposition matches the perspective of other Republican figures like Ron DeSantis, who also showed concerns about government interference, overreach, and misuse of digital currency. Nevertheless, President Joe Biden decided to investigate further the potential outcomes of a central bank digital currency (CBDC) but has not yet made a final decision.

Source - https://economictimes.indiatimes.com/news/international/world-news/us-donald-trump-pledges-to-block-creation-of-federal-digital-currency-calls-it-dangerous-threat-to-freedom/articleshow/106971324.cms

The government often issues currency to accelerate the economy during a recession or economic slowdown. Some of the major advantages of this expansionary policy measure include:

l  Greater Monetary Circulation: When economic growth slows down, the central government increases the supply and circulation of currency through fresh issues.

l  Exchange Rate Stability: Sometimes, the central bank issues money to stabilize the currency's value when the domestic currency loses value in the foreign exchange market compared to foreign currencies. 

l  Higher Purchasing Power: It facilitates the availability of more money to consumers, thus increasing their purchasing power and spending.

l  Fulfill Public Needs: When people have sufficient money at their discretion, they can spend this amount on various required products or services.

l  Accelerates Production: As the demand for goods and services in the market surges, companies scale up their production to increase the supply in parallel.

l  Increases Employment Rate: A higher production results in job creation and promotes more employment opportunities in the nation.

l  Foster Economic Growth: The overall economy experiences accelerated growth, evident through the rise in GDP due to a higher level of demand, supply, and money circulation.

l  Discourage Fake Currency: Sometimes, the government and the central bank issue new banknotes with more security features to replace the old currency, which is easy to fake.

The issuance of currency can have some drawbacks alongside the various advantages discussed above. Let us now have an overview of these disadvantages:

l  Inflation Risk: The issuing of currency can create a disbalance between demand and supply. A higher demand can result in rising prices of goods and services, potentially causing inflation in the long run.

l  Wealth Illusion: As the money supply increases, consumer spending surges, which may indirectly make people feel that they have a lot of wealth.

l  Low Interest Rates: Such measures can decrease interest rates over time, which would further discourage consumers from saving or investing money for their future.