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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 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 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 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 at 17:29
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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 at 15:56

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