Creating Wealth By Printing Currency Notes?
"Monetizing the Deficit" is just a fancy name for this.
Introduction: Beyond Traditional Economics
The conventional wisdom in economics posits that printing more currency merely fuels inflation, disproportionately impacting the less affluent. However, this perspective overlooks the dynamic nature of economic growth and the nuanced role of currency circulation within it. By drawing parallels with the stock market reactions to actions like issuing bonus shares or stock splits, this article challenges the traditional viewpoint and offers an Indian perspective on the necessity and impact of printing currency.
The Analogy of Bonus Shares and Stock Splits
Consider the Indian stock market, where companies issue 1:1 bonus shares or undergo stock splits. Ostensibly, these actions neither create new wealth nor distribute existing wealth. Yet, they often lead to a positive market response. In the era of dematerialised shares, where even fractional shares change hands, these actions don't necessarily enhance liquidity. Yet, they positively impact investor perception and market dynamics. This disconnect between perceived and actual wealth creation sets the stage for re-evaluating the role of currency in an economy.
The Paradox of Economic Growth and Currency Supply
Assume a scenario where the amount of currency – be it the U.S. dollar or Indian rupee – remains static while the economy grows. This creates a paradoxical situation: an abundance of goods and services but a scarcity of currency to transact with. In such a scenario, the scarcity of money could lead to an inflated value of currency, potentially pushing the economy towards barter systems or unregulated surrogate currencies like tokens, neither of which are ideal for a stable economy.
Printing Currency: Lubricating the Economic Engine
As an economy expands, the necessity to print additional currency becomes apparent. Contrary to popular belief, this can act as a lubricant, facilitating smoother economic transactions and potentially keeping prices in check. Central banks, however, must tread carefully, balancing the need for more currency with the risk of devaluation and rampant inflation. This act of printing more money, often termed as “monetizing the deficit”, is a critical tool for managing economic growth and liquidity.
Exploring Alternative Methods
Bank Rate Reduction
While printing currency is often seen as a direct method to increase money supply, there are other mechanisms that the Reserve Bank of India (RBI) can employ, albeit with different implications and timelines. One such method is lowering the bank rate, making credit more affordable. This theoretically encourages corporate sectors to borrow more for productive investments, potentially boosting the economy. However, this approach has limitations, especially in scenarios where demand is low, and companies are hesitant to expand capacity or production.
Quantitative Easing
Another alternative is quantitative easing, where the RBI purchases securities (like Government securities under the Statutory Liquidity Ratio or SLR) from banks. This action effectively places the RBI in the creditor's role, infusing banks with more funds to lend and simultaneously lowering interest rates. Though impactful, this too is a gradual process and may not yield immediate results.
Disadvantages
In contrast, printing currency stands out for its simplicity and speed, particularly in situations like economic slowdowns or pandemic-induced lockdowns. Here, swiftly increasing the money supply by printing notes can be crucial for stimulating demand. This is especially true when government interventions, such as subsidies or direct financial assistance, are necessary to support the poor and reinvigorate consumer spending. Thus, while alternative methods exist and are viable under certain circumstances, the act of printing currency holds a unique position in its immediacy and direct impact on the economy.
Conclusion: A Balanced Perspective on Currency Creation
When critiques arise against governments or central banks like the RBI for printing more notes, they should be considered with nuance. Just as an internal combustion engine cannot run on lubricants alone, an economy needs more than just currency to thrive; it requires the fuel of labour, hard work, and entrepreneurship. However, dismissing the role of currency creation in fostering economic growth is to overlook a vital aspect of modern economic management. It's about finding the right balance – ensuring that the act of printing currency complements the broader economic activities, driving growth and stability.
The RBI, under the stewardship of Governor, Shaktikanta Das, is quite equipped to do so.
