Why we weren’t watching the ECB

People think that Central Banks ‘create money’ or ‘control the money supply’ but this is not true, reads this “Socialist in the City” article (@citysocialist) 

Most money is deposit money, or commercial bank money, created by the loan making activities of private banks, and over the creation of/destruction of this kind of money they have no overt control. Rather, they seek to influence the quantity of money by acting on what they can control, namely, central bank money. Central bank money is a special kind of money that only banks use, and is the mechanism by which banks settle payments. Whilst all commercial bank money is a claim on central bank money, like paper money used to be a claim on gold, the amount of commercial bank money vastly exceeds the amount of central bank money just like paper claims on gold used to exceed the supply of physical gold.

So central banks actions for me and you are pretty 2nd degree. None of us use central bank money, we use commercial bank money. An increase in commercial bank money supply (by loan making) can have effects in the real economy, but supplies of cash to banks by a central bank only increases the money supply by effectively giving banks the confidence to lend more loans because they have more central bank reserves to back up any payments they will need to make. However, the link is not simple.

Read the whole article here