Money: West vs. East

A country’s money supply is made up of two distinct components. State money – the monetary liabilities of a central bank (typically referred to as base, or high-powered, money) – is one element, and is by far the smallest component of the money supply. The second and most important component of the money supply is bank money.

This is the money (deposit liabilities) that is created by the banking system, broadly defined. Changes in the money supply are a dominant force in the economy – a force that determines changes in prices and in economic activity, measured by nominal GDP. Accordingly, we must pay the most careful and anxious attention to movements in a country’s total money supply, as well as to the movements in its components (state and bank money).

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