Editing Monetary system (section)

==Fiat money==
{{main|Fiat money}}
The alternative to a commodity money system is [[fiat money]] which is defined by a [[central bank]] and government law as [[legal tender]] even if it has no intrinsic value. Originally fiat money was paper currency or base metal coinage, but in modern economies it mainly exists as data such as bank balances and records of credit or debit card purchases,<ref>{{cite web|url=http://www.investopedia.com/terms/f/fiatmoney.asp|title=Fiat Money|author=Brent Radcliffe|work=Investopedia|access-date=25 April 2015}}</ref> and the fraction that exists as notes and coins is relatively small.<ref>{{cite web|title=Money creation in the modern economy: an introduction|url=http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneyintro.pdf|publisher=Bank of England}}</ref> Money is mostly created by banks when they loan to customers. Put simply, banks lending currency to customers, subject to each bank's  [[Fractional reserve banking|regulatory limit]], is the principal mode of new deposit creation.<ref>{{cite journal |last1=Hockett |first1=Robert C. |last2=Omarova |first2=Saule T. |title=The Finance Franchise |journal=Cornell Law Review |date=2017 |volume=102 |pages=1153–1155 |ssrn=2820176 |doi=10.2139/ssrn.2820176|s2cid=54696766 }}</ref>

The central bank does not directly fix the amount of currency in circulation. [[Money creation]] is primarily  accomplished via lending by [[commercial bank]]s. Borrowers who receive the money created by new lending in turn affect the stock of money, as paying off debts removes money circulating.<ref name="auto">{{cite web |title=Money creation in the modern economy |url=https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy |publisher=Bank of England}}</ref>

Although commercial banks create circulating money via lending, they cannot do so freely without limit. Commercial banks are required to maintain an on-hand reserve of funds equaling a portion of their total deposits banks (Large banks in the United States, for example, have a 10% [[reserve requirement]].<ref>{{Cite web |title=Reserve Requirements |url=https://www.federalreserve.gov/monetarypolicy/reservereq.htm |access-date=2024-04-19 |website=www.federalreserve.gov |language=en}}</ref>) Central banks set interest rates on funds available for commercial banks to borrow short-term from the central bank to meet their reserve requirement. This limits the amount of money the commercial banks are willing to lend, and thus create, as it affects the profitability of lending in a competitive market.<ref name="auto"/>

In times of economic distress, central banks can act as a borrower to prompt the creation of new money as well; during [[quantitative easing]] they will buy [[government bond]]s and [[mortgage-backed security|mortgage-backed securities]].<ref>{{Cite web |title=FRB: Is the Federal Reserve printing money in order to buy Treasury securities? |url=https://www.federalreserve.gov/faqs/money_12853.htm |access-date=2024-04-19 |website=www.federalreserve.gov}}</ref><ref>{{Cite web |last=Jackson |first=Andrew |last2=Ryan-Collins |first2=Josh |last3=Werner |first3=Richard |last4=Greenham |first4=Tony |title=Where Does Money Come From? |url=https://neweconomics.org/2012/12/where-does-money-come-from |access-date=2024-04-19 |website=New Economics Foundation |language=en}}</ref>