Debt monetization
Money origination
With a government-issued currency serving as a country's only legal tender, the currency can only be created by the government or an entity outsourced to execute this role, which nowadays is the central bank. This is the case in either a fiat or "hard" monetary system.
Debt monitization is the process in which a country's entity in charge of issuing the currency creates the money to finance the government's budget deficit, in full or just partially.
The real world
Let's take the United States for example, though the story is the same in every developed nation. At the onset, politicians campaign for their citizens vote by promising the world to them, because everyone has the right to get anything they want. Instead of stealing from the constituency, through taxes, to cover the expenditures, politicians vote for the country to spend more than its income. In other words, they'll take on deficit spending.
To pay for the deficit, the Treasury borrows money - of the fiat kind, in this case - by issuing bonds. Bonds are contracts issued by governments or corporations, in which they are bound to pay the holder of the contract - the bond - the amount borrowed, plus interest, at a particular time in the future. Moreover, these bonds are what constitutes the national debt. This debt is to be paid by the current and future generations through taxation. As a result, when the government issues a bond, it steals prosperity from the future so as to spend it in the present.
After that, the Treasury holds a bond auction and the primary dealers, which happen to be the world's largest banks, show up and compete to buy part of the national debt and make a profit on it by earning interest. Then, through an exercise called Open Market Operations, the banks get to sell some of those bonds to the Federal Reserve (Fed) at a profit. In order to pay for the bonds, the Fed pulls out its checkbook and writes a check on the amount of the bonds. However, there's no cash available on the Fed's balance sheet to buy the bonds. No problem. It has the power to create the currency out of thin air and that's exactly what it does. Thus, this is how the Fed creates money.
In conclusion, debt monitization is unconstitutional in the U.S. and other countries. The central bank cannot finance the government directly. Therefore, the banks act as middlemen so as to bypass this nuisance.
With a government-issued currency serving as a country's only legal tender, the currency can only be created by the government or an entity outsourced to execute this role, which nowadays is the central bank. This is the case in either a fiat or "hard" monetary system.
Debt monitization is the process in which a country's entity in charge of issuing the currency creates the money to finance the government's budget deficit, in full or just partially.
The real world
Let's take the United States for example, though the story is the same in every developed nation. At the onset, politicians campaign for their citizens vote by promising the world to them, because everyone has the right to get anything they want. Instead of stealing from the constituency, through taxes, to cover the expenditures, politicians vote for the country to spend more than its income. In other words, they'll take on deficit spending.
To pay for the deficit, the Treasury borrows money - of the fiat kind, in this case - by issuing bonds. Bonds are contracts issued by governments or corporations, in which they are bound to pay the holder of the contract - the bond - the amount borrowed, plus interest, at a particular time in the future. Moreover, these bonds are what constitutes the national debt. This debt is to be paid by the current and future generations through taxation. As a result, when the government issues a bond, it steals prosperity from the future so as to spend it in the present.
After that, the Treasury holds a bond auction and the primary dealers, which happen to be the world's largest banks, show up and compete to buy part of the national debt and make a profit on it by earning interest. Then, through an exercise called Open Market Operations, the banks get to sell some of those bonds to the Federal Reserve (Fed) at a profit. In order to pay for the bonds, the Fed pulls out its checkbook and writes a check on the amount of the bonds. However, there's no cash available on the Fed's balance sheet to buy the bonds. No problem. It has the power to create the currency out of thin air and that's exactly what it does. Thus, this is how the Fed creates money.
In conclusion, debt monitization is unconstitutional in the U.S. and other countries. The central bank cannot finance the government directly. Therefore, the banks act as middlemen so as to bypass this nuisance.