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How commercial banks "create money"
Commercial banks obviously cannot influence the amount of currency in the economy or the monetary base, since they are not allowed to print money. They can, however, influence the money supply through the second component of the money supply - the deposits. A bank will increase the money supply simply by lending money to a customer. In the same way, when a loan is repaid or amortized, the money supply decreases.
It may sound odd that the money supply increases by 1 million the same instant a bank agrees to lend this amount. The bank has created money but no wealth (keep in mind that these are different concepts). The bank has simply converted one asset (cash) into another (the promise of repayment), while there is no change in the individual's net wealth. However, after the loan, there is an additional one million available for immediate consumption. It makes no difference if the borrower keeps the money in her account or withdraws them in the form of currency.
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