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how do central banks create money
Picture a central bank as a giant printing press. Not really! In Britain, about ninety-seven percent of the money people hold is bank deposits, and only about three percent is cash.
So who makes the other ninety-seven percent? Ordinary banks do, every time they make a loan. The central bank mostly sets the stage, and steers the price of borrowing.
What a central bank itself creates is called reserves. It buys a bond from a bank and pays by typing new digits into that bank's account at the central bank.
Do that on a huge scale and it is called quantitative easing. The Federal Reserve's balance sheet grew from under one trillion dollars in 2008 to about nine trillion in 2022.
Here is the creation most of us use. You borrow ten thousand dollars. The bank writes the loan as its asset, and at the same moment writes a new deposit for you as its liability.
What holds banks back? Borrowers who can repay, capital rules, and the interest rate. The central bank sets its policy rate, and that feeds through to loans, and so to deposits.
So the whole picture: the central bank creates the base, reserves and cash. Banks create most of the money by lending. And the central bank steers by the price of loans.
Next time you hear that money is printed, remember: a few keystrokes at a bank do most of the creating.