MONEY CREATION

Money creation is the process by which money is produced or issued. There are three different ways to create money:manufacturing a new monetary unit, such as paper currency or metal coins (money creation) loaning out a physical monetary unit multiple times through fractional-reserve lending (credit creation) buying of government securities or other financial instruments by central bank through Open market operations (electronic creation) Coins are produced by manufacturing metal in a factory called a mint.

Banknotes and bank account balances are financial securities issued by a bank.Similarly, money destruction, i.e., the reverse of money creation, can occur in two different ways, depending on how the money was created. The destruction of physically created money occurs when coins are scrapped to recover their precious metal content, which can be incentivized by the value of the metal coming to exceed the face value of the coin, or when the issuer redeems the securities. The destruction of money created through loans occurs as the loans are paid back (deleveraging)

The practices and regulation of production, issue and redemption of money is of central concern to monetary economics (e.g. money supply, monetarism), and affect the operation of financial markets and the purchasing power of money.In modern economies, relatively little of the money supply is in currency (i.e. coins and banknotes); most is created through lending. Competitive minting means that the business of manufacturing coins is open to many competing manufacturers. The mints buy bullion on the bullion market, and manufacture it into coins that they use to pay for the bullion and their other production costs, and to provide a profit.

Analysis of supply and demand cannot proceed in the normal way because by definition, the money price of money is fixed at unity. Instead, metal producers need money to pay their expenses and to realize their profits in money, and so their demand for money is expressed by their willingness to produce and sell uncoined metal at a discount to its value as coin. This discount is the gross profit margin of manufacturing metal into coin, and the greater this is, the more metal the mints will find economical to manufacture into coin. Nationalized minting means that the government has monopolized the business of minting coins, and the government operates mints that produce a national system of coinage. Under a metallic or bimetallic standard with a national mint, individuals normally have a right to bring precious metal to the national mint and to have it coined at a fixed discount. This discount is called seigniorage.Basic economic analysis of this arrangement is that it makes the supply of coin elastic at the fixed price, however this fixed price is effectively a price control, and price control theory implies that the supply of coin would be more elastic (responsive) under competitive supply and no price controls