We can talk about monetary destruction when the central bank withdraws currency from circulation (banknotes, coins—if the government isn’t responsible for this)1 or when banks are repaid loans or debt securities by non-bank agents (i.e., entities that aren’t banks)2. The latter case corresponds to a decrease in bank deposits and therefore to the destruction of money. Credit can therefore be seen in this sense as a « temporary » creation of money. Movements in the money supply are generally explained mainly by the latter.
1 We mention this case here for the sake of completeness. In general, when the central bank withdraws currency from circulation, it is to replace worn-out banknotes with new ones, not to reduce the money supply.
2 It goes without saying that the mechanism is also at work when loan interest is repaid during the loan period. A special case of monetary destruction—in the sense of an operation leading to a decrease in the money supply—not mentioned here is the payment of taxes, insofar as the government’s account is held at the central bank and this part of the monetary base is not included in the money supply. (that said, the money that the government takes from non-bank agents is almost entirely redistributed to them ex post or ex ante, which means that these movements have very little impact on the money supply).
Julien P.
