Myths of money printing

Money printing has become a part of popular jargon in Sri Lanka, particularly since early 2020 following the unprecedented accommodative monetary policy stance of the Central Bank amidst the COVID-19 pandemic. With the increase in currency in circulation, money market excess liquidity, and holdings of the government securities by the Central Bank, attention has been drawn by various stakeholders in the economy to the central bank money printing process. In most countries, the money printing authority is the central bank, but in some other countries, the Treasury or the Ministry of Finance or a separate government agency also prints money. In Sri Lanka, since the establishment of the Central Bank of Sri Lanka (Ceylon) under the Monetary Law Act (MLA) No. 58 of 1949 in place of the Currency Board System, the role of money printing has come under the purview of the Central Bank.

In economic terms, money is not only the currency issued by the Central Bank, but it also includes deposits held by the public with financial institutions. Money is preliminarily considered as a means of payment or a medium of exchange. Money has three key functions, i.e., (i) store of value, meaning money is used to transfer purchasing power into the future; (ii) unit of account, meaning money is used to quote prices and it serves as a standard of measurement of monetary value, and (iii) medium of exchange, meaning money is used to facilitate the exchange of goods and services. In economic terms, the total amount of money that people are willing to hold is called the demand for money. People need money for varied reasons. 

The total demand for money is determined by several factors, including the level of income, interest rates, and inflation as well as uncertainty about the future. These factors can be explained by the three main reasons to demand money as opposed to any other financial assets, i.e., (i) transaction related reasons, (ii) precautionary reasons, and (iii) speculative reasons. People demand money for their transaction purposes. 

The amount of money held for transaction related reasons is called as transaction money balances. Transaction money balances depend on several factors, including improved economic conditions in the form of higher nominal GDP growth, a higher propensity to spend on goods and services. People also demand money as a precautionary measure to meet any unplanned or emergency expenditure that may occur in the future, and this was witnessed during the period where there were mobility restrictions in 2020 following the COVID-19 pandemic. Sometimes people also hold money for speculative purposes, i.e., in order to make a better return than any other assets in the future by holding money today. However, speculative demand for money depends on the rate of return and opportunity cost of holding money. 

Accordingly, total demand for money fluctuates due to various reasons, including the income, interest rates, price level in the economy, deposit rate, wealth, individual preferences, transactions costs and payment habits of the general public. With the innovations in banking facilities, the importance of holding hard cash could be somewhat dampened at present. Overall, when the general public increases their demand for money, the central bank makes every endeavour to meet the demand for new money after following a well-established, internationally acceptable mechanism of issuing new money to the economy, while keeping an eye on the possible demand pressures of the economy.