the actual procedure of creating money (alt thread)

[jimmy]

@sthomper

i was using the term monetary base to mean roughly…

“M0 – currency (notes and coins) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). M0 is usually called the monetary base - the base from which other forms of money (like checking deposits, listed below) are created - and is traditionally the most liquid measure of the money supply.^{[7](http://en.wikipedia.org/wiki/Money_supply#cite_note-6)”}

http://en.wikipedia.org/wiki/Money_supply

OK, understood. If you look at http://mises.org/markets.asp you’ll see a graph there for the St Louis Adjusted Monetary Base. This graph is, obviously, not a chart of the quantity of physical notes and coins… rather it includes commercial reserves with the central bank.

See:
http://en.wikipedia.org/wiki/Monetary_base

Basically it is these reserves that form the basis for the loans that the commercial banks can extend.

The Fed can control the quantity of reserves in the system through the OMOs. The commercial banks then pyramid off the back of this… making home loans etc. (which is where the majority of inflation comes from).

Only a very small portion of the “money” in the economy takes the form of notes and coins and, similarly, only a very small portion of the inflation that takes place concerns inflation of the physical media.