The Monetary Responsibilities of a Central Bank
13 Pages Posted: 31 Oct 2012
Date Written: 1988
In today’s world of paper money, money consists of currency created by the printing press and bank deposits created by the bookkeeping operations of bankers. What limits the ability of the printing presses and the pens of bankers to create money? The currency component of money is central bank money (dollar bills). The bank deposits component of money is backed by central bank money (bookkeeping entries at the central bank). It is the central bank’s monopoly of its own money that allows it to limit creation of the public’s money. In turn, limitation of central bank money and the public’s money limits the price level. The essence of central banking lies in the responsibility to limit the money stock in order to tie down the price level.
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