1
$\begingroup$

As I understand, in most economies, the central bank is supposed to be in charge of monetary policy, which in part means that they are supposed to be the only authority which can increase the amount of currency units available in the economy.

With physical currency, this can be done by making sure that the central bank is the only entity which has access to a mechanism that prints paper notes. Then, the only thing that other banks can do is manage reserves of such paper notes that their clients have given them.

However, if I understand correctly, many modern economies are based on electronic accounts rather than specific physical goods. This means the banks basically have a table which associates each account with how much money it has, and most transactions are only manipulations on these tables.

In such a situation, how can the central bank make sure that the total amount of currency in the economy (i.e, the sum of the values in all the entries of all tables in all banks) is not changed without their permission?

For example, let's say that Bob has 100 units of currency in a non-central bank B. What prevents the bank from changing that number from 100 to 101 in their internal records? I can see that this bank will run into problems if Bob wants to transfer their funds to some account in a different non-central bank C. However, it is not too hard to imagine a situation where such a situation would be unlikely: for example, consider a non-central bank in a remote village where all villagers keep their money in that bank.

So, in an economy not based on physical assets, but electronic accounts, how do central banks force their monetary policy onto non-central banks?

Improve this question
$\endgroup$
4
  • 3
    $\begingroup$ A balance sheet needs to balance. You cannot just mess around with a number. Also, customer deposits are liabilities in a banks book. As a matter of fact, monetary policy is conducted with accounting numbers, not physical money. The sum of all values does change all the time though and is not directly influenced by the central bank. $\endgroup$
    – Alex
    Aug 18, 2022 at 15:28
  • 2
    $\begingroup$ economics.stackexchange.com/a/52316/40033 might be interesting to read (the section about credit and deposits particularly) $\endgroup$
    – AKdemy
    Aug 18, 2022 at 15:35
  • 4
    $\begingroup$ You make some dubious assumptions in your question. Among others, you assume that central banks directly control the money supply. That is not the case. Why don't you ask first to which extent central banks do influence money supply (if that's what you mean by "currency")? $\endgroup$
    – BrsG
    Aug 18, 2022 at 16:31
  • 1
    $\begingroup$ The basic principle is that financial regulations control what private banks can and can't do with their accounts. Only a central bank is permitted to simply fabricate money (that is, to make entries into its accounts which would otherwise be prohibited by financial regulations), the proceeds of which it then provides to the private banks. $\endgroup$
    – Steve
    Aug 18, 2022 at 17:45

0

Reset to default

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.