It's not uncommon to find $20 worth of change in your pocket. Why might this be a problem? Relating to money supply in Canada.
Recall that the monetary base is made up of paper currency and coins outside the Bank of Canada, and chartered bank reserves held at the Bank of canada. Although the Bank of Canada can control bank reserves through monetary policy, and it controls how much paper currency to print, IT HAS NO CONTROL OVER THE AMOUNT OF COINAGE IN CANADA.
The decision to produce coins, which are stamped at the Royal Canadian Mint in Ottawa, is at the sole discretion of the Canadian Government.
1 Answer | Add Yours
When people hoard coins, the government tends to lose its control over the money supply in a country. This becomes more and more of a problem as coins become worth relatively less (in real terms) and cash transactions become fewer.
The problem is that the government (in your case, the Bank of Canada) is no longer able to determine how much money will be in circulation. They can, as you say, determine how much paper money will be out there. But they cannot determine how many coins are.
If people are hoarding coins, this means that the money supply will actually be higher than the Bank of Canada thinks that it is. There will be all these coins that are out there, just sitting around in people's houses. This will keep the Bank of Canada from being able to accurately know what they money supply is and, therefore, from keeping the money supply where it wants it.
We’ve answered 319,197 questions. We can answer yours, too.Ask a question