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Pragmatic Capitalism

Practical Views on Money, Finance & Life

Central Banks and money supply

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Hi Cullen,

I believe you have stated many times that Central Banks do not have direct control over the money supply because private banks are responsible for the majority of credit creation. However upon examining the official stances of Central banks they clearly state that their purpose is to “control the money supply”. I have to wonder whether this misinformation is intentional by the Central banks or do the officials themselves have no clue?

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Posted by Incognito 7
Posted on 02/15/2017 8:44 AM
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Hi Incognito,

The Central Bank controls the quantity of reserves outstanding. It kinda looks like they control the quantities of cash, but they don’t really since you need deposits to request new cash. So the Fed responds to the banking system’s needs. The same basic fact is true of reserves. The Fed provides reserves as the private banking system needs them. QE is a bit different because they were just swapping reserves for bonds. So, same basic concept – no increase in net financial assets.

You might want to review this for more detail:

http://www.pragcap.com/where-does-money-come-from/

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Cullen Roche Posted by Cullen Roche
Answered on 02/15/2017 9:02 PM
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