Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region, is increased. In most modern economies, money creation is controlled by the central banks. Money issued by central banks is termed base money. Central banks can increase the quantity of base money directly, by engaging in open market operations. However, the majority of the money supply is created by the commercial banking system in the form of bank deposits. Bank loans issued by commercial banks that practice fractional reserve banking expands the quantity of broad money to more than the original amount of base money issued by the central bank.
Central banks monitor the amount of money in the economy by measuring monetary aggregates (termed broad money), consisting of cash and bank deposits. Money creation occurs when the quantity of monetary aggregates increase. Governmental authorities, including central banks and other bank regulators, can use policies such as reserve requirements and capital adequacy ratios to influence the amount of broad money created by commercial banks.
Money supply
The term "money supply" commonly denotes the total, safe, financial assets that households and businesses can use to make payments or to hold as short-term investment. The money supply is measured using the so-called "monetary aggregates", defined in accordance to their respective level of liquidity. In the United States, for example:
M0: The total of all physical currency including coinage. Using the United States dollar as an example, M0 = Federal Reserve notes + US notes + coins. It is not relevant whether the currency is held inside or outside of the private banking system as reserves.
M1: The total amount of M0 (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits
M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).
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Monetary reform is any movement or theory that proposes a system of supplying money and financing the economy that is different from the current system. Monetary reformers may advocate any of the following, among other proposals: A return to the gold standard (or silver standard or bimetallism). Abolition of central bank support of the banking system during periods of crisis and/or the enforcement of full reserve banking for the privately owned banking system to remove the possibility of bank runs, possibly combined with sovereign money issued and controlled by the government or a central bank under the direction of the government.
Full-reserve banking (also known as 100% reserve banking, or sovereign money system) is a system of banking where banks do not lend demand deposits and instead, only lend from time deposits. It differs from fractional-reserve banking, in which banks may lend funds on deposit, while fully reserved banks would be required to keep the full amount of each customer's demand deposits in cash, available for immediate withdrawal.
In economics, the monetary base (also base money, money base, high-powered money, reserve money, outside money, central bank money or, in the UK, narrow money) in a country is the total amount of money created by the central bank. This includes: the total currency circulating in the public, plus the currency that is physically held in the vaults of commercial banks, plus the commercial banks' reserves held in the central bank.
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