How Central Banks and Commercial Banks Create Money

Money is created mainly in two ways in modern economies. Central banks create legal tender, also called narrow money (M0), by issuing notes and coins. Commercial banks create most broad money when they approve loans and record the loan amount as a deposit in a customer’s account. This money is largely electronic and can be spent digitally or converted to cash. Contrary to a common belief, banks do not merely lend out existing customer deposits. Most money in circulation is created through bank lending, subject to banking regulations and reserve requirements.

Use The App To Win ₦1m

Stories are shared by community members. This article does not represent the official view of NaijaWorld — the author is solely responsible for its content.