I've noticed a number of articles and comments around the blogosphere talking about government economic relief programs for the coronavirus pandemic. Many of them claim that the government is "printing money" to deal with this crisis, and that this will inevitably bounce back on the "real" economy when the crisis is over. In one sense they're right, but in another they're wrong. Money itself isn't the problem - it's how it's generated and used.
In order to clarify the situation, I thought two 2014 articles in Adobe Acrobat format from the Bank of England might be useful. They explain, in clear and simple terms for non-economists, how money is used, and how it's "created" in a modern banking system. They're written from a British perspective, but their principles apply to all modern economies. Whenever they mention the Bank of England, just think of the US Federal Reserve, and you'll get the idea.
The first article is titled "Money in the modern economy: an introduction".
- Money is essential to the workings of a modern economy, but its nature has varied substantially over time. This article provides an introduction to what money is today.
- Money today is a type of IOU, but one that is special because everyone in the economy trusts that it will be accepted by other people in exchange for goods and services.
- There are three main types of money: currency, bank deposits and central bank reserves. Each represents an IOU from one sector of the economy to another. Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves.
The second article is titled "Money creation in the modern economy".
- This article explains how the majority of money in the modern economy is created by commercial banks making loans.
- Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.
- The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.
I highly recommend reading both articles. They'll give you a much clearer understanding of where money comes from in our modern economy, and how it's being used to relieve some of the stresses of the coronavirus pandemic.
Of course, creating so much "new money" will impose economic stresses of its own. It's a matter of relieving the primary stresses (caused by the impact of the pandemic on our economy) as quickly as possible, and worrying about the secondary stresses (caused by the sudden creation of so much "new money") later, because there's no time to do so now. In one sense, it's a "damned if you do, damned if you don't" approach. That's not necessarily very comforting, but it helps to understand why these steps are being undertaken - and how.