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In many countries governments have made laws that bar themselves from creating money directly. Instead they have to go via a circuitous route involving the creation of bonds. This means that the government has to go into debt in order to create more money. The reason for this self imposed restriction seems obvious to me - it is a kind of advertising to prospective purchasers of government bonds. It says "don't worry about us devaluing your bonds through excessive money creation because we have written it in stone that we're never going to do that". If it wasn't for this assurance then government bonds would be harder to sell.

Whatever the reasoning - after many years being interested in this question I have never come across any official explanation. Surely somewhere there must be a record of how these restrictions came into existence. Where are these records?

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    $\begingroup$ The question in the title and the question in the end are quite different. Are you asking for the history of limits on money printing? $\endgroup$ – Giskard Mar 2 '19 at 11:09
  • $\begingroup$ Yes I do want to know the history. Specifically I am interested in the reasoning (as used at the time) behind the introduction of the laws, not just the laws themselves. I've now slightly tweaked the title. $\endgroup$ – Mick Mar 2 '19 at 11:21
  • $\begingroup$ How relevant is this question to the electronic disposition of money? Are you talking about economies that primarily use printed money? $\endgroup$ – Karlomanio Mar 6 '19 at 16:47
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    $\begingroup$ I was using the word "printing" loosely... I meant it to include electronic money creation. I'll edit the OP. $\endgroup$ – Mick Mar 6 '19 at 17:29
  • $\begingroup$ Are you familiar with the relationship between the "new model" of warfare exhibited by WWI/WWII, and the concurrent transition off of the gold standard in major global economies? $\endgroup$ – heh Dec 6 '19 at 21:09
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In any healthy economy, the central bank is independent of the executive government. (Since the central bank can be thought of as part of the 'government', I want to be specific about which parts of government I am referring to—by "executive" I mean the body of people who are in power and who administer policies.)

This separation is in order to separate fiscal policy from monetary policy, as this makes it easier to achieve monetary policy objectives. Otherwise, the executive could enforce money creation merely to achieve some objective, such as increased government spending or a decrease of local-currency denominated debt, but this would send inflation skyrocketing. Instead, the executive (through the Treasury) sells bonds on the open market. Any entity is free to buy those Treasury bonds, and the price is determined by the market. (An executive that controls the central bank and forces them to buy Treasury bonds is not really independent of the central bank—it is just a show.) So, the Treasury selling bonds is how the executive raises money for itself, but it also increases the demand for money, so the central bank needs to be part of the group of entities that buy the bonds, in order for interest rates to remain unchanged. Needless to say, when the central bank buys bonds, it is increasing the supply of money.

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  • $\begingroup$ There are pros and cons to those arguments - which I don't have the space to go into, but what I'm really after is the paper trail of how/when it got written into law. $\endgroup$ – Mick Mar 10 '19 at 15:56
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I don’t think there is any official restriction. In fact during the recent Great Recession there were many considerations of central banks being involved in helicopter money by some economists arguing that inflation expectations could be raised with for example by central banks depositing certain amount of money to every single individual (although this did not come to be nor it was ever advocated by a large majority).

Also during their respective quantitative easing (QE) programs both ECB and Fed purchases private debt too - so the money was not created just with the government bonds.

Rather the reason why it’s being done through government debt is the practical one. Increasing demand after government debt lowers the interest at which government borrows and all the interest that government pays to central bank is usually send back right to the government treasury. So it’s practical in the sense that government lowers its borrowing costs by doing so. Central bank purchasing bonds is for all practical reasons equivalent of just depositing the money into government account but in addition it lowers the market interest rate for its bonds at which also the private investors buy them.

Another advantage of doing this through bond purchase is that central banks sometimes want to contract money supply. If it would be done through direct depositing to government account that would create a situation where bank has to withdraw money from government account ending in some silly situation where cash strapped government has to borrow just so the money supply can contract. With bonds this is not an huge issue.

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Originally there was real money. Gold coins. Then paper that could be turned in for gold but was easier and lighter to use. Then governments stopped backing the paper with gold and just printed more paper 'money'. Later computers let them do the equivalent in a database without any physical printing.

In the US Nixon took the country off of real money in 70s. The dollar was sinking and he said they would support it by selling gold to prove the value. Unfortunately they quickly ran out of gold and stopped doing that.

In more recent times many countries have been demanding their gold which we held physically here be returned. The US did not have enough gold to repay everyone and told Germany it would take 7 years until they got all theirs back. If we actually had it it could have been done in months or even weeks but the US had to buy more gold somewhere to have any to return what was owed.

Other countries have had similar situations with real money, backed money, and then fiat money. Some just started out with fiat and like Zimbabwe ended up very badly by printing too much.

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I give you my guess... whatever it worth. First, when government sells bonds it doesn't necessarily creates new money... public purchases those bonds with existing money, with expectation to be repaid with interest rates. And how government repays? By collecting taxes. So as you see, this is not printing money... this is borrowing from the public, and later repaying it back with public tax money...

I do not believe that any central bank in any country is truly "independent". Now from time to time the central bank will decide to print new money, and purchase government bonds with it... and then "forgive" the government debt. When the central bank does this, then you may call it "printing new money".

Why governments play this game, where there is an illusion of an independent organization (central bank) that decides how much money to print? I don't know... I guess they want to make it look like that the national currency is not a simple paper that the government can print any time it wants, so they create this illusion of a complicated and obscure process how new money is printed and pretend that nobody understands what is going on.

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  • $\begingroup$ This is not correct money is not created by central bank “forgiving the debt” but by the purchase by central bank itself since the purchase is made with new money irrespective of whether central bank forgives the debt or not in the future $\endgroup$ – 1muflon1 Dec 7 '19 at 14:47
  • $\begingroup$ yes and no... if the government will repay this bobd, then this new money will leave the circulation and you back to the original size. It's same as borrowing foreign money (outside the circulation), so it's not exactly creating new money. When foreign countries buying US bonds, you don't call "creating new money". $\endgroup$ – James Dec 7 '19 at 17:49
  • $\begingroup$ in my comment I said Central Bank purchase creates new money, not private purchase. Yes central bank can always reverse this purchase if it wishes to contract money supply, nonetheless the new money is created for the time it holds the bond. $\endgroup$ – 1muflon1 Dec 7 '19 at 17:54
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    $\begingroup$ the guy asked why governments don't create new money and instead sell bonds... technically if the central bank buys bonds with new money, it's still not creating new money... because the government has to repay it. When you personally borrow money from a bank, it doesn't matter whether this money is new or old... you still have to repay it... but of course if the central bank doesn't demand its money back, then it's like creating new money. But this is a game, an illusion. $\endgroup$ – James Dec 7 '19 at 18:11
  • $\begingroup$ yes it technically does. If the bond worth 100€ is issued at time t and has to be repaid at time t+10 then money supply will be 100€ higher for period from t to t+10 and then if the money is repaid at t+11 the money supply would contract by 100€. Money supply, like other aggregates must be defined at some point of time like year 2019 or some another unit of time. It’s true that if bond is destroyed (or as a matter of fact if it’s perpetual) the stock also increases and it increases at all future time periods, however this does not mean temporary purchases don’t affect money supply $\endgroup$ – 1muflon1 Dec 7 '19 at 18:26

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