Who creates money? Central banks or commercial banks?
A central bank typically introduces new money into the system by printing new money to purchase items from member banks.  The central bank can purchase whatever it chooses.  It typically purchases government bonds but the Federal Reserve purchased mortgage-backed-securities (MBS) during the 2008 panic since the FED was the only one willing to pay full price for MBS after the crash of 2008. The bank, upon receipt of the new money, can loan the money out.  A minimum reserve ratio specifies how much money the bank has to keep on hand.  A reserve ratio of 10% means the bank must have $10 for every $100 in loans. As an example, let's say the FED prints up some new money to purchase some office desks from a member bank.  It prints $10,000 to purchase some desks.  The bank receives $10,000.  It can create up to $100,000 in loans without exceeding the 10% minimum reserve ratio requirement.   How would it do so?  A customer would come to the bank asking for a $100,000 loan.  The bank would create an account for the customer and credit $100,000 to the customer's account.  There is a problem, however.  The customer borrowed the money to buy a boat so the customer writes a check for $100,000 to the boat company.  The boat company attempts to deposit the $100,000 check into the boat company's bank.  The boat company's bank will ask the originating bank for $100,000 in cash.  The originating bank only has $10,000 in cash on hand so this demand will immediately bankrupt the originating bank. So what actually happens?  The originating bank actually only loans out reserves * (1 - minimum reserve ratio) so it can meet demands for the loans it originates.   In our example the bank that received the initial $10,000 from the FED will only loan out $10,000 * (1-0.1) = $9,000.  This allows the bank to cover checks written by the person who borrowed the $9,000.  The reserve ratio for the bank is now $1,000/$9,000 which is 11% and is over the minimum reserve requirement.  The borrower makes a purchase with the borrowed $9,000 and the seller deposits the $9,000 in his bank.  The bank that receives that $9,000 now has an additional $9,000 in reserves which it will use to create loans of $9,000 * (1 - 0.1) = $8100.   This continual fractional reserve money creation process will continue across the entire banking system resulting in $100,000 of new money created from $10,000. This process is explained very well here. "Scenario 1 is typically the better description. If commercial banks were allowed to simply ""create"" money, they wouldn't be in the mess they're in now. In the U.S., the central bank is the Federal Reserve or Fed, and is the only entity (not the government, not the banks, not the people) that is allowed to create money ""out of thin air"". It does this primarily by buying government debt. The government spends more than it takes in, and so to come up with the deficit, it issues bonds. The Fed buys a certain amount of these bonds, and simply prints the money (or more realistically authorized the electronic transfer of $X to the Treasury) which the government then spends. That places money in the hands of corporations and the people, who turn around and spend it. However, long-term, the interest charges on money borrowed from the Fed will actually remove money from the economy. The central banks, therefore, have to constantly make marginal changes to various monetary policy tools they have when the economy is just humming along. If they do nothing, then too much of a short-term increase in money supply will result in there being ""too much money"" which makes an individual monetary unit worth less (inflation), while making money too hard to get will reduce the rate at which it's spent, reducing GDP and causing recessions. The exact scenario you describe is typically seen in cases where the government is running with a balanced budget, and the central bank thus can't give its ""new money"" to the government to spend when it wants to increase the money supply. In that situation, the central bank instead lowers its lending rate, the percentage interest that it will charge on loans made to other banks, thereby encouraging those banks to borrow more of the money created by the central bank. Those banks will then use the money to make loans, invest in the market, etc etc which puts the money in the economy.  In the U.S., the Fed does have this tool as well, but increases or decreases in the ""Federal Funds Rate"" are typically used to influence the rate that banks charge each other to borrow money, thus encouraging or discouraging this lending. A lowering in the interest rate makes banks more likely to borrow from each other (and from the Fed but the amount of money ""created"" this way is a drop in the bucket compared to current ""quantitative easing""), and thus increases the ""turnover"" of the existing money in the economy (how many times a theoretical individual dollar is spent in a given time period)." Empirial evidence for the second scenario: Can banks individually create money out of nothing? — The theories and the empirical evidence. Excerpt: It was examined whether in the process of making money available to   the borrower the bank transfers these funds from other accounts   (within or outside the bank). In the process of making loaned money   available in the borrower's bank account, it was found that the bank   did not transfer the money away from other internal or external   accounts, resulting in a rejection of both the fractional reserve   theory and the financial intermediation theory. Instead, it was found   that the bank newly ‘invented’ the funds by crediting the borrower's   account with a deposit, although no such deposit had taken place. This   is in line with the claims of the credit creation theory. Thus it can now be said with confidence for the first time – possibly   in the 5000 years' history of banking - that it has been empirically   demonstrated that each individual bank creates credit and money out of   nothing, when it extends what is called a ‘bank loan’. The bank does   not loan any existing money, but instead creates new money. The money   supply is created as ‘fairy dust’ produced by the banks out of thin   air.
"left out of the pictures is the degree to which the ECB is buying their own bonds.  At least with the FedResInk, we know what sort of ""open market"" action is being taken to keep interest rates held as close to zero as possible.  I coke dealer can make sure his ""sales"" are through the roof by using his own product, but eventually he has to buy more supply.  I think people are confused about central banks being that coke dealer or being his supplier." Question:  So basically the money created in this globalized digital world where capital is free to roam,  it is referring to digital money and not actual physical cash.  So the goldbugs that talk about america becoming weimar republic is delusional, since there isn't enough physical cash in relations to how big the economy is.    And it is actually the debt lending that acts as a derivative of cash money that goes around posing as the money supply or the blood supply of an economy, and that feels like inflation, but when the debt is defaulted on or destroyed, underwritten or even paid back closing the circuit then it's deflationary?   But does defaulting on ones debt create inflation since that money is still in the system and not being paid off?  You know, when debts are paid off they are taken out of the system. "Since you're an idiot, here is a quote [""The Bank of England (formally the Governor and Company of the Bank of England) is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world ""](http://en.wikipedia.org/wiki/Bank_of_England).  Note that this bank, **founded in 1694**, is the model on which most modern central banks have been based.  Now a quote from you:  &gt;The UK did NOT sell debt and simultaneously purchase its own debt in the past (until modern times).   Owned, fool.  And another quote to rub it in ""The lenders would give the government cash (bullion) and also issue notes against the government bonds, which can be lent again.""  You still have not listed an empire that did not purchase it's own debt." Yes, money is created out of thin air, and it is a good and necessary thing. All money, even commodity money such as gold, is given value only by what can be traded for it. So in that sense *all* money is created out of thin air, because it represents the payment of a future debt. Money merely serves as IOUs between traders.  Who do you think should be responsible for adding money to the system? Inndividuals? Been tried, doesn't work so well. Individual banks? Been tried, doesn't work so well. Nation states? Works a lot better, although can still fail.  So far having a central bank issue money as an economy needs it for trade has been the most successful method to deal with who gets to issue the IOUs.  EDIT: see my post above on a little how and why it works as it does. There are two answers to this (excluding central banks which are really just a banks to private banks):  **Please note:  This is an oversimplification and not accounting for the fact that banks operate in both categories now.  **  Banks are either depository institutions or financial service/transaction providers.  *  Depository institutions are your typical retail bank (regions, boa retail, wells fargo retail, etc).  They accept deposits from account holders and lend out via reserve lending to mortgages and business loans for their revenue generation.    * Financial service/transaction providers are better known as IBanks.  You have your Goldman Sachs, Deutsche Bank, JP Morgan, Morgan Stanley, etc.  These have traditionally been banks that do not accept deposit accounts but revenue generation comes from financial services such as asset management and research or from financial transaction facilitation such as market making (offering both buy/sell quotes in capital markets).  This is generally the role that banks have played historically from the medieval ages on... They started out as being entities that provided access to connecting buyers and sellers of markets. borrow money from the Central Bank Wrong premise. They cannot borrow as much as they want and they cannot borrow without collateral i.e. government debt instruments they hold or any other instrument with value.  And banks don’t have unlimited collateral to borrow against.  Secondly central banks aren’t in the business of lending unlimited money. The more money they lend out, the more is the money supply which stokes inflation which will eventually lead them to stop lending. At any point of time they want a certain amount of money movement, so they can control inflation and interest rates within an agreed limit and as limited by their economy. No sane central bank would want to stoke hyperflation by printing money at will e,g, Helicopter money. So the only other way for banks is to accept deposits from private individuals. You can also argue that banks make money by connecting lenders and borrowers and make their profit by being the middleman without using their assets. So you can say they are making a profit with the minimum usage of their capital. Albeit they have the central bank looking over their shoulder to police their behaviour. While some banks do charge fees for keeping deposits Yes but many provide certain extra services for which they charge. That is how they differentiate between no fee accounts and fee paying accounts. It's quite the contrary. If there are mass failures of banks, then the money supply will collapse and there will be vicious deflation, increasing the value of money held as cash. It's only if governments print money to bail the banks out that there's a (small) risk of hyperinflation and the effective collapse of the currency. Trade credit is fine and works without a central bank.  All it needs is contract law.  The perversion of that is using trade credit collected from somebody else to pay for goods and services mandated by the government as legal tender.  That creates false savings that expand exponentially.  It probably wouldn't happen much in a free market unless bought at a steep discount by the person receiving it.  This is how collection companies work, they buy receivables from telephone companies or other businesses at a steep discount and try to collect on them.    In a non-fiat system there would be plenty of trade credit, because how else are you going to drum up business?  Personal relationships would ensure that debts were made good, everyone in the economy would be a banker with their own money or goods.    I'm not saying we need libertarian minarchist government here for any of this to work.  The government could intervene from time to time and tax to build infrastructure or raise a military for defence or whatever they really wanted but at least they wouldn't be creating booms and busts with their borrowing activity. This is adequately covered by the differential between lending and receiving interest rates.  ...and technically, they pay the central bank an interest rate on the money lent as well, which means that they *are* paying back equity holders (all be it very slowly and very slightly).  The equity holders have the ability to will money into existence, so there's no artificial limitation they face with respect to the branch banking system. Yes there is an inverse relationship but that's how it's meant to work.  Debt creates money. Banks do lend out customers savings for return interest as the bank can make a profit rather than the cash just sitting there. The process of Lending pumps money into the economy that wouldn't be there otherwise so it creates money. The banks will either have a cash deficit or surplus at end of each day and either need to borrow from other banks to balance their books or if in surplus lend to other banks to make interest because that's more profitable than holding the cash surplus. The overnight cash rate then determines interest rates we pay.    High private debt occurs when lots of people are investing &amp; buying things so there is stimulation and growth in the economy. A lot more tax is being paid in these periods so government debt is lower because they are getting lots of tax money. Also To stimulate the economy into this growth period the government usually sells off large cash bonds (lowering their debt) to release cash into the economy, the more cash available the less banks have to borrow to cover deficits on overnight cash market and the lower interest rates will be. Lower interest rates = more borrowing and higher Private debt.   The government can't let growth get out of control as they don't want high inflation so they do the opposite to slow down growth, I.e buy up cash bonds and take money out of economy causing higher interest rates and less borrowing = More debt for government less for private. "They could have printed 5.0T or 10.0T or 1000 quadrillion. It doesnt make any difference for the steps a Central Bank takes. They choose a figure based on balancing inflation vs interest rates.  The legal powers Central Banks or IMF have do vary (i.e. to perform quantitative easing, purchasing company bonds, purchasing retail bank bonds) but they all follow that principle. Their tools are very limited and theyre legally obligated to seek certain targets like ""inflation between 0 to 2%""" Commercial banks are not allowed to create real money.  The confusion comes from the different ways money is counted.  In M2, deposits count as money.  So if you take $100 and deposit it in the bank, M2 will count the $100 deposit as money, as well as the $100 cash the bank has from the deposit.  So under M2 the money supply has increased by $100, but no real money was created.  Commercial banks can't create real money out of thin air, and they can't loan out money they don't have. I think you'll find some sound answers here: Money Creation in the Modern Economy by the Bank of England Where does money come from?  In the modern economy, most money takes   the form of bank deposits. But how those bank deposits are created is   often misunderstood. The principal way in which they are created is   through commercial banks making loans: whenever a bank makes a loan,   it creates a deposit in the borrower’s bank account, thereby creating   new money.  This description of how money is created differs from the   story found in some economics textbooks. Central Banks always controlled by politics.  Bush Jr. told Greenspan that he needed to be reelected, and all Greenspan could do was lower interest rates to help, and that fueled more speculation by the commercial bankers.  The president appoints the fed chairman, so dont tell me that they are independent of politicians.    the whole notion that a central banker must be independent of the government force is fuking insane.  You let private bankers control your monetary policy and you lose your nation's sovereignty.  I'd rather put my trust to elected officials than unelected private financial mercenaries.   Nationalize the FED. Inflation is a reflection on the expansion of the money supply, aka debt,  being created by a central bank. Fiat currencies usually inflate, because there is no limit to the amount of debt that can be created. The consequences of reckless money supply expansion can be seen throughout history, see Zimbabwe, though there have been many others...Brazil, Argentinia, etc...