The central bank, like a business, has assets and liabilities. When it wants to increase its assets, say, for example, it wants to buy a financial asset, it has two options:
– it can either request the money it needs on the market (by issuing a loan, as a company would do)
– it can simply create the money it needs, since it has this power (let’s assume here that this creation takes the form of banknotes, to simplify matters)
In both cases, the central bank will have a debt: the first with a maturity date set in an explicit contract and with a given interest rate, the second with no maturity date and no interest rate. The money created is therefore a free resource for the central bank. The only thing you can demand when you go to the central bank counter is new banknotes in exchange for your old ones. You therefore have an interest-free claim that can only be repaid to you in the form of a new interest-free claim. As the central bank is an entity that is conceptually under the control of the state, you actually have a claim on the government. So, the good news is that you can be sure that it will always be able to repay you… which is characteristic of our current system of fiat money.
J.P.
