While new broad money has been created on the consumer’s
balance sheet, the first row of Figure 1 shows that this is
without — in the first instance, at least — any change in the
amount of central bank money or ‘base money’. As discussed
earlier, the higher stock of deposits may mean that banks
want, or are required, to hold more central bank money in
order to meet withdrawals by the public or make payments to
other banks. And reserves are, in normal times, supplied ‘on
demand’ by the Bank of England to commercial banks in
exchange for other assets on their balance sheets. In no way
does the aggregate quantity of reserves directly constrain the
amount of bank lending or deposit creation.

(1 new money.jpg)

1 new money.jpg (76KB - 674 downloads)