Extras
Synopsis
In 2003, Richard Werner released a book by the title of “Princes of the Yen”, which cut through the complex jargon of central bankers and for the first time made this obscure world accessible to the public. The book became a number one bestseller in Japan. Yet, over ten years after it was first released, the English version, is still on its first edition!
Central Bank Money Creation Explained
The documentary “Princes of the Yen” has taken two years to make, and for much of this time I struggled to understand exactly how and what types of money a central bank was creating on its computer screens. Did they create the same money we hold in our accounts? The answer was, that while central banks did not create the same money that we hold in our accounts and spend with our debit cards, they did have a number of ways by which they could influence the creation of this type of money.
Reserve Creation:
The type of money central banks create is called central bank reserves. This money is held exclusively in accounts at the central bank. After the war, the Bank of Japan used newly created reserves to buy the worthless war bonds from Japanese banks. The banks received reserves and the central bank received the worthless papers. In one set of transactions the Japanese banks were transformed from insolvent to healthy. It is a common held belief that central bank money creation causes inflation. In the case of reserve creation, this is not true, because the money in circulation in the economy does not increase. Central bank reserves are held exclusively at the central bank and cannot be used directly for domestic spending. If the Bank of Japan on the other hand had decided that it would not buy these worthless papers, the banks would have been forced to take the losses from their capital, which would have reduced the amount of money in circulation and caused deflation.
Credit Creation:
Credit refers to the type of money held in bank accounts, and is created exclusively by commercial banks (here referred to as banks). An increase or decrease in the amount of credit in circulation is a primary cause for either growth or recession. A central bank has the ability to directly influence the quantity of credit money in circulation, it does this in the following way: When a central bank buys an asset from a non-bank party the following happens; the central bank creates reserves in the banks account at the central bank, the private bank credit’s the third party’s bank account with the corresponding amount, and the central bank receives the bond. Banks act as an intermediary, and they receive a fee for this service. New credit money has been created, the amount of money in circulation in the economy has increased.
Window Guidance:
Another way by which central banks influence the amount of credit in circulation is window guidance. Window guidance is an informal mechanism by which a central bank asks a bank to issue loans to specific industrial sectors or companies. In Japan, window guidance was at the core of the war economy system. When the Japanese army needed more tanks, the Bank of Japan would tell the banks which industries in the supply chain needed to be given loans, so that the required number of tanks could be produced. After the war, this system was adapted to the production of consumer goods. Window guidance was the mechanism that enabled the Japanese economic miracle.