What is Commercial bank money

Commercial bank money (bank money) consists of deposit balances that can be transferred either by means of paper orders (e.g., checks) or electronically (e.g., debit cards, wire transfers, and Internet payments). Commercial bank money is non-physical, as its existence is only reflected in the account ledgers of banks and other financial institutions.

How is is Commercial bank money created

Commercial bank money is created through fractional-reserve banking. This is the world’s practice where banks obliged to keep only a fraction of the deposits that have been given them as reserve and lend out the remainder.

Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.

Debt is Money

Technically we can state Debt is Money. Let’s break it down. Debt for the lender is the asset of money. Debt for the borrower is his liability to the lender, because technically a just a newly created record about the money that banks owns the lender. In this sense money is created by new records in the Banks Books out of “nothing”. We know there are some Reserve requirements for some countries, so banks are required to secure their loans by a central bank by lending a money at the the central bank. But the central banks money (not currency) is created the same way. It’s debt-generated money in this sense, because the commercial banks lend money at central banks and central bank then credits the loan amount to the commercial bank’s account at the central bank.

Also find more details about this technically done in the Monetary Base article

Relation to the Money supply

Because of the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple (greater than 1) of the amount of the Monitory Base created by the country’s central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators.

The Money Supply defines several different money aggregates, but generalized held to be the total amount of currency in circulation plus the total of the Commercial bank money for the country. In modern economies, relatively little of the money supply is in physical currency, the was majority (Approx 97%!) of money is created by private banking!