Money creation

Money creation, or money issuance, is the process by which the money supply of a country or economic region is increased. In most modern economies, both central banks and commercial banks create money. Central banks issue money as a liability, typically called reserve deposits, which is available only for use by central bank account holders. These account holders are generally large commercial banks and foreign central banks.

Central banks can increase the quantity of reserve deposits directly by making loans to account holders, purchasing assets from account holders, or by recording an asset (such as a deferred asset) and directly increasing liabilities. However, the majority of the money supply that the public uses for conducting transactions is created by the commercial banking system in the form of commercial bank deposits. Bank loans issued by commercial banks expand the quantity of bank deposits.

Money creation occurs when the amount of loans issued by banks increases relative to the repayment and default of existing loans. Governmental authorities, including central banks and other bank regulators, can use various policies—mainly setting short-term interest rates—to influence the amount of bank deposits that commercial banks create.

Monetary policy

The monetary authority of a nation—typically its central bank—influences the economy by creating and destroying liabilities on its balance sheet with the intent to change the supply of money available for conducting transactions and generating income.