The Fed has even less control over M2 and other measures of money supply since these are under greater control of the private banks and the non-bank public. The Fed can influence money supply by directly controlling the amount of currency. Banks offering checkable deposits influence money supply by offering these deposits. The Money Creation Process To understand how banks affect the economy's supply of money first consider the balance sheet of a typical commercial bank. The two sides of the balance sheet must always balance.
Banks make profit by offering loans and holding interest bearing assets.
Banks also hold currency. The amount of cash they voluntarily hold is called vault cash. They are also required to hold a fraction of their deposits with the Fed. This reserve requirement helps banks to meet unexpected withdrawals and also gives the Fed some control over the economy's money supply. Banks keep only the minimum balance required with the Fed.