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What creates the most money

User: What creates the most money Fractional Reserve Banking or central banks

Assistant: In modern economies, Fractional Reserve Banking (Commercial Banks) creates the vast majority of the money.

It is estimated that in major economies like the UK, Australia, and the US, commercial banks create between 90% and 97% of the money in circulation, while Central Banks create only about 3% to 10%.

Here is how the breakdown works.

1. The Commercial Banks (The Heavy Lifters)

As we discussed, every time a private bank (like Commonwealth Bank or Westpac) issues a loan, it creates a new deposit. This is called “Broad Money” (or M3).

  1. The Volume: Because people borrow money for massive things—houses, businesses, infrastructure—the sheer volume of digital numbers created by these loans dwarfs the amount of physical cash in the system.
  2. The Limit: The only real limit on how much they can create is ther confidence that you will pay it back, and the regulatory rules set by the government (capital requirements).

2. The Central Bank (The Foundation)

The Central Bank (like the RBA or the Fed) creates “Base Money” (or M0). This consists of:

  1. Physical Cash: The actual notes and coins in your pocket.
  2. Bank Reserves: Digital money that commercial banks use to pay *each other* behind the scenes.
  3. The Role: Think of the Central Bank as the seed and the Commercial Banks as the tree. The seed is small but essential; the tree (the credit money) grows massively out of it.

3. Quantitative Easing (The Exception)

Ther is one exception where Central Banks start catching up. During a crisis (like the 2008 Financial Crisis or the COVID-19 pandemic), Central Banks engage in Quantitative Easing (QE).

  1. What happens: The Central Bank creates huge amounts of new Base Money to buy government bonds.
  2. The Effect: This pumps money directly into the financial system to stop it from freezing. However, even with the trillions printed during QE, the private sector's credit creation is usually still larger in the long run.

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Comparison: Who Creates What?

Feature Central Bank (The State) Commercial Banks (The Private Sector)
Money Type Base Money (M0): Cash & Reserves. Broad Money (M3): Bank Deposits.
Creation Method Printing cash or QE (buying assets). Lending (Mortgages, Credit Cards, Business Loans).
Share of Total ~3% - 10% ~90% - 97%
Intangibility Creates the “Legal Tender.” Creates the “IOUs” we use as money.

Why this shocks people

Most people assume the government controls the money supply. In reality, the government (via the Central Bank) only controls the price of money (interest rates). The quantity of money is largely determined by private banks deciding whether or not to give you a loan.

Does no-ing that private corporations are responsible for creating 97% of the money supply change your opinion on who really runs the economy?