Central Banks and the Money Supply

Banks, Bank Lending, and Money

Commercial banks are profit-oriented depository institutions. Bank customers place deposits with these institutions, and also use these bank deposits to make payments. That is, banks deposits are used as money. Since the bulk of the money supply resides in commercial banks, banks are often viewed as custodians of our money supply.

Commercial banks have an even larger monetary role because they are a conduit for the implementation of monetary policy. Currently, the most common way for the money supply to increase is through bank lending. When a bank makes a loan, the proceeds of the loan are in the form of an increase in the customer’s deposit balance at the bank. Payment ...

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