is the process of converting or establishing something into legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....
. It usually refers to the coin
A coin is a piece of hard material that is standardized in weight, is produced in large quantities in order to facilitate trade, and primarily can be used as a legal tender token for commerce in the designated country, region, or territory....
ing of currency or the printing of banknote
A banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. In addition to coins, banknotes make up the cash or bearer forms of all modern fiat money...
s by central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
s. Things such as gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
In mineralogy, diamond is an allotrope of carbon, where the carbon atoms are arranged in a variation of the face-centered cubic crystal structure called a diamond lattice. Diamond is less stable than graphite, but the conversion rate from diamond to graphite is negligible at ambient conditions...
s and emerald
Emerald is a variety of the mineral beryl colored green by trace amounts of chromium and sometimes vanadium. Beryl has a hardness of 7.5–8 on the 10 point Mohs scale of mineral hardness...
s generally do have intrinsic value based on their rarity or quality and thus provide a premium not associated with fiat currency unless that currency is "promissory": That is the currency promises to deliver a given amount of a recognized commodity of a universally (globally) agreed to rarity and value, providing the currency with the foundation of legitimacy or value. Though rarely the case with paper currency, even intrinsically relatively worthless items or commodities can be made into money, so long as they are difficult to make or acquire. Monetization may also refer to exchanging securities for currency, selling a possession, charging for something that used to be free or making money on goods or services that were previously unprofitable.
In many countries the government has assigned exclusive power to issue or print its national currency to a central bank. For example, in the USA a "federal system, composed of a central, governmental agency—the Board of Governors—in Washington, D.C., and twelve regional Federal Reserve Banks" does this. The government treasury must pay off government debt either with money it already holds or by financing
it by issuing new bonds which are sold to either the public directly or the central bank in order to raise the funds required to satisfy the debt. In this latter case where bonds are placed with the central bank, the central bank will create the needed money by conducting an open market purchase, i.e. by increasing the monetary base through the money creation
In economics, money creation is the process by which the money supply of a country or a monetary region is increased due to some reason. There are two principal stages of money creation. First, the central bank introduces new money into the economy by purchasing financial assets or lending money...
process. This process of financing government spending is called monetizing the debt.
Monetizing debt is thus a two-step process where the government issues debt to finance its spending and the central bank purchases the debt, leaving the system with an increased supply of base money.
Effects on inflation
When government deficits are financed through this method of debt monetization the outcome is an increase in the monetary base, the money supply. If a budget deficit persists for a substantial period of time, the monetary base will also increase, shifting the aggregate-demand curve to the right leading to a rise in the price level. When governments intentionally do this, they devalue existing stockpiles of fixed income cash flows of anyone who is holding assets based in that currency. This does not reduce the value of floating or hard assets, and has an uncertain (and potentially beneficial) impact on some equities. It benefits debtors at the expense of creditors and will result in an increase in the nominal price of real estate. This wealth transfer is clearly not a Pareto
improvement but can act as a stimulus to economic growth and employment in an economy overburdened by private debt. It is in essence a "tax" and a simultaneous redistribution to debtors as the overall value of creditors' fixed income assets
drop (and as the debt burden to debtors correspondingly decreases). If the
beneficiaries of this transfer are more likely to spend their gains (due to lower income and asset levels) this can stimulate demand and increase liquidity. It also decreases the value of
the currency - potentially stimulating exports and decreasing imports - improving the
balance of trade
The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...
. Foreign owners of local currency and debt also lose money,
Fixed income creditors experience decreased wealth due to a loss in spending power.
This is known as "inflation tax
Inflation tax is a term which refers to the financial loss of value suffered by holders of cash and fixed-rate bonds, as well those on fixed income , due to the effects of inflation...
" (or "inflationary debt relief"). Conversely,
tight monetary policy which favors creditors over debtors even at the expense of reduced
economic growth can also be considered a wealth transfer to holders of fixed assets
from people with debt or with mostly human capital to trade (a "deflation tax").
A deficit can be the source of sustained inflation only if it is persistent rather than temporary, and if the government finances it by creating money (through monetizing the debt), rather than leaving bonds in the hands of the public.
Revenue from business operations
In some industry sectors, monetization is a buzzword
A buzzword is a term of art, salesmanship, politics, or technical jargon that is used in the media and wider society outside of its originally narrow technical context....
for adapting non-revenue-generating assets to generate revenue. Failure to monetize web sites was a problem that caused many businesses to fold during the dot-com bust
The dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...
. Web sites that do generate revenue are often monetized via advertisements or subscription fees.
Monetization of non-monetary benefits
Monetization is also used to refer to the process of converting some benefit received in non-monetary form (such as milk) into a monetary payment. The term is used in social welfare reform when converting in-kind payments (such as food stamps or other free benefits) into some "equivalent" cash payment. From the point of view of economics and efficiency, it is usually considered better to give someone a monetary equivalent of some benefit than the benefit (say, a liter of milk) in kind.
- Inefficiency: in the latter situation people who may not need milk cannot get something of equivalent value (without subsequently trading or selling the milk).
- Black market growth: people who need something other than milk may sell it. In many circumstances, this action may be illegal and considered fraudulent. For example, Moscow pensioners (see below for details) often give their personal cards that allow free usage of local transport to relatives who use public transport more frequently.
- Changes on the market: supply of milk to the market is reduced by the amount distributed to the privileged group, so the price and availability of milk may change.
- Corruption: firms that should give this benefit have an advantage as they have guaranteed consumers and the quality of the goods supplied is controlled only administratively, not by market competition. So, bribes to the body that choose such firms and/or maintain control can take place.
Russian social welfare monetization of 2005
In 2005, Russia transformed most of its in-kind benefits into monetary compensation.
Before this reform there were a large system of preferences: free/reduced price of travels on local transport, free supply of drugs, free health resort treatment, etc. for diverse categories of society: military personnel, the disabled, and separately, persons disabled due to WWII, Chernobyl
Chernobyl or Chornobyl is an abandoned city in northern Ukraine, in Kiev Oblast, near the border with Belarus. The city had been the administrative centre of the Chernobyl Raion since 1932....
disaster "liquidators," inhabitants of Leningrad during the siege
The Siege of Leningrad, also known as the Leningrad Blockade was a prolonged military operation resulting from the failure of the German Army Group North to capture Leningrad, now known as Saint Petersburg, in the Eastern Front theatre of World War II. It started on 8 September 1941, when the last...
, former political prisoners, and just for all pensioners (women 55+, men 60+). This system was a legacy of the Soviet Union, but it was heavily extended by populist laws of central and regional authorities during the 1990s.
By the law 122-ФЗ of 22 August 2004 this system was converted into cash payments by various means:
- abolition of preference, compensated by raising of wage (e.g. free use of local transport for military personnel) or pension (e.g. different preferences for Chernobyl liquidators)
- for three most important preferences (free local transport, 50%-price suburban rail transport, free supply of drugs): a choice between this preference and some extra money.
The main causes of friction in the reform were the following:
- technical and bureaucratic problems (e.g. for usage of 50% discount for suburban rail transport a person should present a paper from local State Pension Fund office stating that he/she doesn't choose monetary compensation);
- separation of all preference-recipients into federal and regional accordingly to the body issuing a preference legislation. The largest group, that is pensioners, was regional. It was the main cause of problems:
- In poor regions local government had to abolish these preferences with small or zero compensation.
- Even if these preferences were retained, they could apply only to pensioners of this region, so, e.g. Moscow Oblast
Moscow Oblast , or Podmoskovye , is a federal subject of Russia . Its area, at , is relatively small compared to other federal subjects, but it is one of the most densely populated regions in the country and, with the 2010 population of 7,092,941, is the second most populous federal subject...
pensioners cannot use Moscow
Moscow is the capital, the most populous city, and the most populous federal subject of Russia. The city is a major political, economic, cultural, scientific, religious, financial, educational, and transportation centre of Russia and the continent...
metro and buses freely. (Later these problems would be generally solved by a series of bi-lateral agreements between neighboring regions.)
The wave of protests emerged in various parts of Russia in the beginning of 2005 as this law started to work. But government measures (raising of compensations, normalization of bureaucratic mechanisms, etc.) eventually neutralized opposition.
The long-term effects of the monetization reform varied for various groups. Some people received compensation in excess of the services they received (e.g. in rural areas without any local transport, the free transport benefit was of little value), some have found that the compensation is insufficient to cover the cost of the benefits needed. Transport companies and railroad have obvious benefits from monetization as they receive higher cash receipts when these categories use their services (previously in some regions more than a half of passengers did not pay for municipal transport, without sufficient compensation to the companies from the government). Effects on medical system are controversial. Doctors and nurses have to use their time to fill in many forms to justify free receipts, thus reducing time spent on services.
United States agricultural policy
In United States agricultural policy, "monetization
Monetization of U.S. in-kind food aid is the sale of food commodities purchased in and shipped from the United States and sold for local currency in a recipient country by "cooperating sponsors", which are typically U.S.-based non-governmental organizations or recipient governments...
" is a P.L. 480 provision (section 203) first included in the Food Security Act of 1985
The Food Security Act of 1985 , a 5-year omnibus farm bill, allowed lower commodity price and income supports and established a dairy herd buyout program. This 1985 farm bill made changes in a variety of other USDA programs...
(P.L. 99-198) that allows private voluntary organizations and cooperatives to sell a percentage of donated P.L. 480 commodities in the recipient country or in countries in the same region. Under section 203, private voluntary organizations or cooperatives are permitted to sell (i.e., monetize) for local currencies or dollars an amount of commodities equal to not less than 15% of the total amount of commodities distributed in any fiscal year in a country. The currency generated by these sales can then be used: to finance internal transportation, storage, or distribution of commodities; to implement development projects; or to invest and with the interest earned used to finance distribution costs or projects.