Who controls the money supply?
Who decides how much money a country has, and how bank deposits can grow without printing any paper money.
Transcript
Who decides how much money a country has? And if no new paper money is printed, how can there be so much more in the bank?
Cash is only a small slice. In most countries, roughly nine tenths of all money is just numbers in bank accounts.
Those numbers are real money. You can pay, save and borrow with them, exactly like cash.
So where does it come from? Mostly from banks. When a bank approves a loan, it types the amount into the borrower's account.
That new deposit is new money, and no printing press is involved.
When the loan is repaid, the money disappears again. So the money supply grows and shrinks with lending.
Nobody controls it with a single switch. The central bank sets the interest rate, which is the price of borrowing. High rates mean fewer loans, and low rates mean more.
It also creates reserves, the money banks hold with it, and regulators set rules on how much banks may lend against their capital.
Governments matter too: when they spend and borrow, more money flows into accounts. And in the end, people and firms must want to borrow.
The real limit is not a number of notes. It is what the economy can produce. If money grows much faster than goods, prices rise, and that is inflation.
Money is mostly a promise, and managing it means managing trust.
More in this series
1:33What is money?
From barter to fiat money: what money does, why it works, and what inflation is.
1:44Money and gold
Why gold was money, how paper receipts and the gold standard worked, why it ended in 1971, and why gold is still stored today.
1:28How exchange rates work
The price of one currency in another: why we need it, what moves it, and who it helps or hurts.
1:31Why US rate hikes shake the world
How a Federal Reserve rate hike pulls money into the dollar and squeezes currencies, debts and growth elsewhere.