Doesn’t creating more money devalue a currency?

In the final part of this series of articles, Tadgh Quill-Manley, BA Economics (UCC), General Council – Munster Agricultural Society, explores disinformation & the power of money: its impact on the agricultural sector. Read part one and part two.

So what about inflation, you ask? We’ve heard a lot about the word since late 2021.

Doesn’t creating more money devalue a currency, leading to the apocalyptic disaster of inflation, and in the worst case sees us going the way of Venezuela and Zimbabwe?

While it is true that in the past, when money was inseparable from gold (by means of the gold standard), issuing more money would devalue it, as its scarcity relative to gold decreased.

However, with modern fiat currencies, inflation can practically only occur in a scenario appropriately described by economist Milton Friedman, which is “caused by too much money chasing too few goods”.

Again, this view is shared by John Maynard Keynes, who theorized that when demand exceeds production capacity, the result is inflation.

Therefore, if new credit is channeled into increasing production and employment, the productive capacity of all assets in the sector can be realized.

This can create many new jobs, which can incorporate, for example, a job guarantee program) and higher incomes for farmers to increase consumption of goods and services (thereby increasing GDP).

Most importantly, farmers can be confident that they have the means to access the necessities of family life.

Deprecated method

Why do we still refer to an outdated method, at a time when money was attached to a commodity (gold) to describe the current system?

Would we accept a train engineer describing the workings of a modern locomotive by discussing the mechanics of a steam engine instead? I doubt.

If so, why is it acceptable on one of the most watched news channels in the world?

Now, the whole theoretical aspect of a more ideal form of money control might sound great, but what about the practical application of these measures?

While countries like the United States, and more recently the United Kingdom, can order their central banks to adopt these measures with few restrictions, countries in the euro zone, which are not currency issuers, bound by the fiscal “disciplinary measures” of Article 123 TFEU, which prohibits the direct financing of public expenditure by the national central bank.

Therefore, governments must act creatively to achieve these goals through other methods at the national level.

As things stand, the Irish government raises a huge amount of money through the issuance of government bonds through the National Treasury Management Agency.

Holders of government bonds are usually private investors and foreign institutions.

However, European rules allow a country’s central bank to buy debt securities (e.g. bonds) on the secondary market, after they have been previously issued to private investors and have started to be traded on the money market.

The Bank of England started this practice in 2009.

The euro currency area uses the asset purchase program, under which central banks buy assets from banks.

Between September 2014 and the end of 2018, under the ECB’s asset purchase program (APP), the Eurosystem purchased more than €2.5 trillion in securities.

Government bonds

By the end of December 2018, over €30 billion of Irish government bonds, a significant share of the Irish government bond market, had been purchased under the scheme.

There is little evidence that liquidity conditions have deteriorated over the period, contrary to initial expectations when the program was initially announced.

A program similar to this could be implemented at the national level, with a greater proportion of bonds issued by the NTMA to be purchased by the Central Bank of Ireland itself.

german landesbank

This could be complemented by the creation of Irish equivalents of Germany’s ‘Landesbanken’, which are state-backed municipal banks.

They have a specific investment mission, for example, development and infrastructure, emphasizing a long-term perspective rather than immediate short-term returns, a mentality negatively associated with many private financial institutions.

These banks in Germany have local knowledge of their economy, which informs their long-term investment mindset, accounting for 15% of all business lending in the country.

The Landesbanken are in fact the central bank of a region’s savings bank (providing liquidity). They also provide wholesale banking services (i.e. to large organizations and/or inter-regional financial services).

The German public banking system offers us a model for creating employment in rural areas.

They prevent the flight of our skilled human capital abroad and support significant capital investment.

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