This overview should be a good starting point for a broader understanding of the U.S. monetary system . Details can be found in later articles. The terms in italics are links to the Glossary and back. The banking system , including the Federal Reserve, is the source of all dollar-denominated money. The Fed creates the monetary base , also known as Fed money, comprising notes and coins and deposits at the Fed .
Banks expand the money supply by issuing loans and thereby creating credit money .
The Fed influences the amount of bank lending through its selection and control of the Fed funds rate , the benchmark for all short term interest rates. However it does not directly control the amount of credit money created by commercial banks which are private profit-seeking enterprises. The amount of money created is a function of the demand for bank credit at the going lending rate . Banks normally lend to any borrower who is found capable of paying the interest and returning the principal on a date-certain. In effect, all credit money is borrowed into existence.