Article Summary
The article’s main focus is on the fundamental of the central bank currency in the monetary system. Armelius et al (2020) argues that individuals cannot be issued with the mandate of converting their commercial money into central bank money. The significant question is viewed from two perspectives because the currency available to individuals is the commercial and central bank currency (Armelius et al., 2020). However, a rapid decline has been illustrated in the public among many countries who want to use the central bank currency. The author finally concludes that the people’s need to have control over money is the reason for the need for the central bank currency.
Article’s Main Idea
The main idea of the article is the ability to convert bank deposits into cash whenever a person deems it right for use in the monetary system. The banks as custodians where the deposits can be withdrawn anytime for use in the economy. Because the central banks of various countries offer forms of money, the convertibility through a central bank digital currency can help in serving the purpose (Armelius et al., 2020). Making the money deposits into a central bank available whenever the depositors need to use can help in promoting its use. Central banks using a digital currency will mean that people can have access to convert their deposits into cash irrespective of seeking the conversion services at the central bank premises.
Article Discussion
Issue at Hand
The issue at hand being analyzed by the author is the measure that can be taken on the central bank money. There should be laws, regulations, and supervision. Among the aspects required to be included in the central bank digital currency is enabling the last resort facility to a lender. Another issue addressed by the author is the safety of commercial banks and how essential it will be to the central bank money (Armelius et al., 2020). Despite shifting from commercial money to the central bank digital money, uniformity has to prevail. As a key feature of the issued money from any bank (commercial or central bank), the value and nature must be the same. For example, the same value of a depositor’s money to one commercial bank should be the same value of money that can be transferred to any other bank whenever such a transaction is executed.
Author’s Point of View
The author’s point of view is that neither cash nor a central bank digital currency (CBDC) tends to be important to a monetary system in countries where deposit insurance, macroeconomic policies, and government finances are applicable. The presence of these aspects makes the commercial banks’ money safe which rules out the need for a central bank currency (Armelius et al., 2020). The decision to make on whether the access to central bank money by the public in form of cash or CBDC is important to remain a ruling that the national context can come out with a solution. Before it can be concluded whether the central bank currency is equally important in a monetary system, the author suggests more research.
Substantiation of the Author’s Opinion
In strengthening the author’s opinion, he considers the central bank digital currency to be an alternative to the commercial bank currency. Because national governments offer policies and guidelines that dictate the nature and manner money can be converted into cash whenever needed, the central bank should retain its superiority and step in situations where commercial banks may not be able to convert depositors’ money into cash.
Other Literature Works about the Monetary System
Fractional-reserve banking is one of the integral roles of the central bank. In fractional-reserve banking, banks may hold money above the legal minimum to control its supply. The holding can be the in form of paper bills and coins, which are common currency types circulating among the public. The money in circulation in an economy is regulated by the central bank of a nation (Adrian, 2021). The central bank also oversees the banking system operations to ensure policies and guidelines are adhered to. Due to inflation, an economy is controlled using monetary policies that define the amount of money in circulation. When activities in an economy must be performed, traders leverage the transactions by borrowing money from commercial banks to supplement investments (IMF, 2022).
On occasions when commercial banks run out of money convertible into cash by depositors, the central bank increases the money through fed lending to commercial banks (Agarwal, 2022). The bank owners’ investment money in starting the banks is the bank capital that investors have put in to generate profit. Bank capital is what is used in calculating the return on capital invested.
Personal Opinion on the Matter
A personal opinion regarding money is to ensure its supply and availability are regulated to manage and facilitate the completion of transactions in the trade market. Commercial banks should be checked by the central bank and their regulations reviewed to receive enough money for deposit conversion whenever required. The important thing about the monetary system is to ensure a steady supply of money in moderate amounts.
References
Adrian, T. (2021). Digital technology: How it could transform the international monetary system. In Remarks at the 29th International Financial Congress of the Bank of Russia, juin. Web.
Agarwal, P., (2022). Monetary System. Web.
Armelius, H., Claussen, C. A., & Hendry, S. (2020). Is central bank currency fundamental to the monetary system? (No. 2020-2). Bank of Canada Staff Discussion Paper. Web.
IMF, (2022). Monetary Policy and Central Banking. Web.
Xu, Q., & Xiong, A. (2022). The impact of financial sanctions on the international monetary system. China Economic Journal, 1-10.