When considering the mechanism for replenishing the mass of money in circulation, it should be noted that the concept of “money issue” and “money issue” are not identical. So the release of money into circulation occurs constantly. Non-cash money is released into circulation when commercial banks provide a loan to their customers, and cash is issued when banks, in the process of carrying out cash transactions, provide them to customers from their own operating cash desks. Emission – the release of money into circulation, which leads to an overall increase in the money supply in circulation.
The emission of money in their broad sense is carried out at two levels:
- Central banks;
- commercial banks and financial and credit institutions equated to them in terms of functionality.
The issue of non-cash money is carried out by a system of commercial banks, cash is issued by the Central Bank (in Ukraine – by the National Bank).
Central banks have the exclusive (monopoly) right to issue banknotes. The current legislation does not provide such a right to any other banks. The Ministry of Finance (Treasury) also does not have the right to issue banknotes.
Both in the conditions of the gold standard, and in the current conditions, the principle of commodity provision of banknote emission on a credit basis is preserved. However, unlike the gold standard, the mechanism for implementing the functions of the budget treasury does not work, according to which the amount of paper money in circulation, including banknotes, was balanced, taking into account the corresponding coefficient, by the available gold reserve. The evolutionary development of the emission process went in a different direction – the institutional structures and the mechanism of functional regulation of the monetary system began to be strengthened. The role of the main link – the Central Bank – has noticeably grown in this.
There are three areas of the Central Bank s issuing activities:
- financing the state budget deficit through operations in the government securities market;
- refinancing of commercial banks – providing them with a certain amount of payment instruments;
- purchase of foreign currency for national money, which is sent to official foreign exchange reserves.
The emission mechanism operates on the basis of a bank (credit, deposit) multiplier. Banking, credit and deposit multipliers characterize the multiplier mechanism from different perspectives.
The bank multiplier characterizes the multiplication process from the point of view of the multiplier subjects and operates regardless of who the loans are provided to: commercial banks or the government. In addition, it can be used in the case when the National Bank buys securities or currency from commercial banks. As a result, the banks resources invested in active operations decrease, the free reserves of these banks used for lending operations increase, that is, the bank multiplier mechanism is activated. The National Bank can also “turn on” this mechanism when it reduces the rate of required reserves.
The deposit multiplier reflects the object of the multiplication – money in the deposit accounts of commercial banks.
The credit multiplier is the main driving force behind the multiplication process, that is, it reflects the fact that multiplication can only be carried out as a result of lending to the economy (economy).
The mechanism of the bank multiplier and, as a consequence, the issue of non-cash money is controlled exclusively by the National Bank, while the issue is carried out by the system of commercial banks.
Commercial banks create bank money by providing credit loans to their customers. When banks provide loans, the money supply grows, and when the loans received are paid back, it decreases.
The ability of any commercial bank to create bank money (to issue money) depends on the size of the excess of its reserve. A bank can issue new loans and create additional money only when it has free reserves, that is, reserves that exceed the statutory minimum amount that it must keep under any conditions.
The required bank reserve is a part (percentage rate) of bank deposits and other liabilities received by the bank from other sources, which, according to the current legislation, must be kept in the form of cash in commercial banks and other deposits with the Central Bank.
With the help of regulation of the rate of required reserves, several tasks are solved:
- firstly, the regulatory definition of required reserves is aimed at protecting the interests of customers and the reliability of commercial banks, supporting their liquidity;
- secondly, in the event of non-standard situations, commercial banks have the opportunity to receive an additional amount of cash at the National Bank;
- third, they are used as a key instrument for regulating the ability of commercial banks to issue bank money (using a high reserve ratio to reduce such emission, a low one – to stimulate).
When determining the potential for the development of the emission process and, accordingly, forecasting the dynamics of the money supply, the money base indicator is used. In terms of content, the monetary base is a unifying indicator of the reserve money of the banking system functioning in the country, on the foundation of which, due to the effect of the credit multiplier, the total mass of money in circulation is formed.
The effect of the credit multiplier consists in the automatic expansion of the emission process, carried out by the multiple multiplication of new reserves formed in the banking system. The multiplier effect characterizes the way of functioning not of an individual bank, but of the banking credit system as a whole. At the same time, the principle is implemented: “what a separate bank is not able to do, all banks can do together”. We are talking about the cumulative growth of the money supply based on the fact that reserves move from one economic entity to another – from a bank to an economic agent in the non-financial sector, and back – again to a bank.
The multiplier process is associated with the flow of new funds (deposits) into the system of commercial banks. Such admission can be carried out in various forms:
- receipt of cash;
- conducting operations on the open market for treasury securities;
- receipt of checks issued to another bank;
- obtaining direct loans from the National Bank.
The multiplier process is continuous. The multiplier coefficient is calculated, which reflects how much the money supply in circulation has increased in a certain period of time.
Let s consider the interaction of factors influencing the money supply (money supply formation) on the part of the banking system (see Figure).
The upper part of the diagram shows a group of factors influencing the formation of the monetary base, on which the amount of excess reserves depends. In the lower part, the factors that determine the value of the expansion coefficient (credit multiplier) are determined. The interaction of two quantities – the monetary base and the money multiplier determines the potential of the banking system to ensure the growth of the money supply, the additional supply of money.