Fiat issuance. Money aggregates

Explain to me how the increase in paper pieces can make a society richer. If that is the case, why is there still poverty in the world? — Hans Hermann-Hoppe 

Fiat money is created (“printed”) by central banks.

A central bank is a financial institution given exclusive control over the production of a fiat money currency.

The fiat monetary units can be issued in physical form (notes & coins) and in digital form (commercial banks reserves at the central bank).

The total amount of fiat monetary units is called base money or state money.

Commercial banks produce money substitutes (also called near-money) through the fractional reserve of the (state) money that is deposited in them; which “multiply” the base money.


Money multiplier = (near money + base money not reserved in banks)  / base money

Also, money multiplier = 1 / average reserve ratio

*Reserve ratio = money deposited / money reserved



Alice deposits 100$ in the bank A.

Because bank A does not expect most of its depositors to require a withdrawal from their accounts at the same time, bank A holds 10% of the received deposits as a reserve, and lends the rest.

So bank A keeps 10$ as a reserve and lends 90$ to Bob.

Alice checking account shows she has 100$ available.

Bob uses the loan to buy a bike from Amy.

Amy deposits her 90$ in bank B.

Bank B keeps 9$ and lends 81$ to Henry.

Amy’s checking account shows she has 90$ available.

Henry uses the loan to buy a surfboard from Eva.

Eva deposits her 81$ in bank C.

Bank C keeps 8.1 $ and lends 72.9 $ to Pankun.

Eva’s checking account shows she has 81$ available.


Until now,

from the initial 100$ cash from Alice (state money), it have been created 271$ of near-money :

100$ in the Alice’s checking bank account in bank A

90$ in Amy’s checking bank account in bank B

81$ in Eva’s checking bank account in bank C


The initial 100$ cash now are distributed:

10$ in bank A

9$ in bank B

8.1$ in bank C

72.9$ on Pankun’s pocket.


Near money: 100 + 90 + 81 = 271$

Amount reserved in banks from deposits = 10 + 9 + 8.1 = 27.1$

Money: 10 + 9 + 8.1 + 72.9 = 100$

Money multiplier = 271$ + 72.9$ / 100$ = 3.4


If the 72.9$ would have ended up deposited in a bank and the process would have continued while banks maintain an average of 10% as the reserve ratio:

Money multiplier = 1 / 0.10 = 10

Total amount of near-money = 100 * 0.10 = 1000$.


The banks’ near-money creation process is sometimes called “money creation process”. But, the real money creation process is executed by the central bank. The near-money creation process is executed by (commercial) banks. This is why near-money is also called bank money.


Money aggregates:

Bank money increases the supply / demand relation for money, so consumer prices are in close relation to the total amount of bank money, while they are not much related to state money.

This recognition led to the study of the money aggregates  (M0, M1, M2, M3).

M0 is the state money. M1, M2 and M3 represent claims on base money. They are calculated aggregating different kind of money substitutes to the base money.


 Just before the global financial crisis of 2007-2010, the top 30 fiat currencies of the world had an average money multiplier close to 10, that is, the amount of M3 (bank money) was 10 times the M0 (base money). There were around 10 claims of 1$ per $ created.

By 2018, after all the base money printing for rescuing big banks and financial institutions, the money multiplier went down to 5.5. The sum of the top 30 fiat money M0 went from $5 trillion to $20 trillion, but the amount of M3 did not increase at such a high rate.

During the crisis, M3 of some currencies even contracted temporally due to a decreasing in borrowing in such an uncertainty time, leading to a light deflation of consumer prices.     



The money multiplier is limited by the need for base money to settle payments.

The main tool to influence that money multiplier, and thus M3, is the manipulation of some interest rates by central bank intervention:

Lower interest rates incentives borrowings to increase, so bank money is created. M3 increases.

Higher interest rates incentives borrowings to decrease, so bank money is destroyed. M3 decreases.

Recommended thread for more info and charts: