Money (M1) consists of notes and coin in circulation in the non-bank public, plus bank deposits. The is the definition used by all of the G20 Central Banks.
In Australia, notes are printed by the Reserve Bank of Australia (RBA), the Central Bank, and coin is minted by the Treasury. The Supply of Money is demand driven. The banks purchase notes from the RBA and coin from Treasury. The non-bank public purchase notes and coin from the banks.
Bank deposits are created when banks lend to the private sector, when the Australia government makes payments to the private sector, when overseas payments are deposited in bank accounts in Australia, and when the RBA or the government purchase government securities from the private sector.
Bank lending creates additional deposits. The banks cannot lend without existing deposits. Why? Bank lending is regulated. It is subject to prudential and capital adequacy requirements. Why do these regulatory requirements exist?
