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Government, license to print money

Ever wondered how much money our government prints? Do you even realize that Governments print money. You may say who cares, as long as life can go on.... when we are all just trying to make ends meet, and after all Governments know what they are doing. We all know that printing too much much money will lead to higher and even hyper inflation.... which is bad. But do we ever stop and think that our government actually prints tons of money every month, what happens to it, and how should it affect our thinking when it comes to complaining about our hard earned taxes that Government wastes.

My daughter had to do a project in Grade 3 on inflation, and asked me how much money our Government prints. That started me thinking .....

HISTORY OF MONEY
- The earliest trade was done via a barter system, where one good was exchanged for another good. Although this system facilitated economic activity, did it have some limitations, nl. in order to trade did you have to find someone with goods that you wanted, and who wanted your goods.
- It was therefore only a matter of time before some common exchange developed, in the form of a valuable that could more easily be carried around like Copper, Silver and even Gold.
+The problem with this form of exchange was that it had to be weighed and didn't exactly have a pre-determined value. Even if a weight was stamped on it, did it lead to practices like shawing off bits.
- Over time the notion developed that the medium of exchange didn't need to contain it's intrisic value, providing it was issued by an authority (originally Landlords and Kings) who would guarantee that it could at any time be exchanged for it's face value in Gold, Silver, Copper or anything else of value, and so the concept of money was born.
+ Originally, money was put into circulation by the issueing authority when paying for valuables like Gold, Silver, etc. and it just seemed like a natural result that such valuables would be kept in a vault to backup the issued money, which in more modern times became to be known as the Gold Standard.
+ Another way that such money was put into circulation was with these Landlords and Kings paying their workers and soldiers with it, which they in turn could use to purchase food and goods.... more often from the very Landlords and Kings.
- These Landlords and Kings in time became the governments of the day, and money was being created on less and less valuable mediums, to the point where we now have paper-money with the biggest problem being how to prevent it from being counter-feited.

INFLATION IS BORN
- In more recent times, Governments dropped the requirement that money printed and put into circulation had to be backed up by a store of Gold. The first government was USA in 1940, and the last government to drop it was Switserland around the 1980's.
+ Relatively little fuss was made, because it happened rather quitely, people were to busy trying to make a living, academics thought that money had become merely a means of exchange to facilitate economic activity, and in the mean time more and more money was being printed to help fund government expenditure, all seemingly enhancing the economy of the country.
- Soon enough realisation dawned that the effect of all this money being printed was causing it to become worth less and less, and the monster called inflation was discovered. But governments very quickly learnt how to monitor inflation, attempting to control it..... and for a good 50 years the (developed) world saw unknown prosperity.
- Needless to say could this miracle not continue for ever, and in 2011 the developed nations of the world (USA and the EU) finds itself in a situation where governments are spending even more money than it is able to print in an attempt to stimulate it's economy ..... euphemistically referred to as 'quantitative easing'.

WHERE DO GOVERNMENTS FIND MONEY TO FUNCTION
....as they say, to provide services to the people.
- As we are so acutely aware, Governments get their money from Taxes. But they also get money by borrowing (Gilts, Bonds), locally from it's citizens, as well as other institutions, and overseas...... and by printing money.
- So, you may ask, why bother with the other methods if you can just print more. Well that's an easy question, and we all know the answer ..... inflation. That is why such a big deal is made monitoring inflation. Not just for the sake of attempting to control inflation, but as a way for Government to ensure that it's printing money does not get out of control.

WHAT DOES GOVERNMENT DO WITH THE MONEY THAT IT PRINTS
- Just as we (or our employers, or customers) deposit money into our bank accounts, do governments deposit it into their bank accounts. Then it uses the money to pay it's expenses..... to who and what ever.
They also lend some of it to the banks, which we shall come to later.

HOW MUCH MONEY DOES GOVERNMENT PRINT
- Information about how much taxes were raised and how much money is borrowed is available, but the amount of money printed is secret..... why is that?
+ A good indicator of the amount of money printed is the increase in the M0 Money Supply value which is Coins and Notes in circulation.
* From various sources, it appears that for the years 2009 to 2011, an average of approx. 5 Billion Rands of new money per year was printed by the South African government.
+ It would also not be too far-fetched to say, that nor do we know on what this 5 billion Rand (that's 5000 million Rand) was spent.
- So, next time someone complains about a few million Rand wasted by Government on some project, exercise or golden handshake, rather think about the 5 billion that is being created out of thin air, and most likely going back to thin air.
- I suspect that this all will come as a shocking revelation to many, not because it's necessarily bad, but because it is happening every day, and we dont know about it, and nobody talks about it.The question therefore is not how much money is being wasted by Government, but rather how much new money is being printed ..... because that indicates the real wastage. No wonder politicians will give anything to be the ruling government.

HOW COME THERE SEEMS TO BE MORE MONEY THAN WHAT GOVERNMENT PRINTED ... THE ROLE OF BANKS
- Until now, we have focussed on the M0 money supply, but there are other indicators of money supply like M1, M2, M3 which is far in excess of merely the Coins and Notes in circulation. What are these? It is a difficult to comprehend the fact that there is more money in the world (or country) that what Governments (and Kings) have had printed.
- This is because of the effect of lending money, which if done repeatedly from one institution to the next and so on, results in the perception that people have more money that what is simply in circulation.... this is known as the money/loan multiplier.
- If this concept is difficult to grasp, check out the figures and realization will dawn on you. Furthermore, this is why Governments these days keep such a frantic watch over inflation, which is not just fueled by new printed money, but also the extent of this multiplier effect.
+ This multiplier effect is managed by issues such as the 'Reserve Ratio' that limits banks by how much reserves they must keep and not lend out, as well as of course the lending rate (repo rate).... both items that are controlled by our Reserve Bank.
- So, people might hate the banks because of their exorbitant fees, but in reality they serve this very amazing function of creating much more money that there really is, and explains why governments go to such great extremes to bail out banks in financial trouble. Imagine if this wonderful multiplier effect fell flat.......

FOOD FOR THOUGHT
- There is talk about a future money-less society, ie. no more physical money, where all transactions will be electronic, ie. via debit, credit or a money card. One advantage will be no money to steal, but that wont stop electronic fraud. The big question is, how will Governments then fund themselves because you obviously cannot print electronic money ..... or can you?

Really, they should teach our children about these things at school.

Pierre Leon Myburgh

SOURCES OF INFORMATION ON MONEY SUPPLY
www.sadcbankers.org/EconomicData/Pages/Statistics.aspx Select South Africa.
wwwrs.resbank.co.za/WebIndicators/IndicatorDetail.aspx
wwwapp.resbank.co.za/QbQuery/TimeSeriesQuery.aspx For Code KBP enter 1000 and follow the prompts.