Heterodox
 Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region, is increased. In most modern economies, money is created by both central banks and commercial banks. Money issued by central banks is termed base money. Central banks can increase the quantity of base money directly, by engaging in open market operations or quantitative easing. However, the majority of the money supply is created by the commercial banking system in the form of bank deposits. Bank loans issued by commercial banks that practice fractional reserve banking expands the quantity of broad money to more than the original amount of base money issued by the central bank.
 Central banks monitor the amount of money in the economy by measuring monetary aggregates (termed broad money), consisting of cash and bank deposits. Money creation occurs when the quantity of monetary aggregates increase. Governmental authorities, including central banks and other bank regulators, can use various policies, mainly setting short-term interest rates, to influence the amount of broad money created by commercial banks.
 The term "money supply" commonly denotes the total, safe, financial assets that households and businesses can use to make payments or to hold as short-term investment. The money supply is measured using the so-called "monetary aggregates", defined in accordance to their respective level of liquidity. In the United States, for example:
 The money supply is understood to increase through activities by government authorities, by the central bank of the nation, and by commercial banks.
 The authority through which monetary policy is conducted is the central bank of the nation. The official goals of a central bank may vary, according to the country or the region. In most developed countries, central banks conduct their monetary policy within an inflation targeting framework, whereas the monetary policies of most developing countries' central banks target some kind of a fixed exchange rate system. 
 The central bank is the banker of the government and provides to the government a range of services at the operational level, such as managing the Treasury's single account, and also acting as its fiscal agent (e.g. by running auctions), its settlement agent, and its bond registrar. A central bank cannot become insolvent in its own currency. However, a central bank can become insolvent in liabilities on foreign currency.
 Central banks operate in practically every nation in the world, with few exceptions. There are some groups of countries, for which, through agreement, a single entity acts as their central bank, such as the organization of states of Central Africa,  which all have a common central bank, the Bank of Central African States; or monetary unions, such as the Eurozone, whereby nations retain their respective central bank yet submit to the policies of the central entity, the European Central Bank. Central banking institutions are generally independent of the government executive. According to the Bank of England, more than 150 central banks were classed as independent in 2020.
 Monetary policy is the process by which the monetary authority of a country, typically the central bank (or the currency board), manages the level of short-term interest rates and influences the availability and the cost of credit in the economy, as well as overall economic activity.
 The central bank's activities directly affect interest rates, through controlling the preferred policy interest rate of the central bank (in the US this is the Federal funds rate). By affecting the level of interest rates, the central bank indirectly affects investment, stock prices, private consumption and the public's demand for money, as well as net export via the national currency's exchange rate. The various channels through which aggregate demand is affected by changes in interest rates is known as the monetary transmission mechanism.
 Central banks usually conduct monetary policy either through administratively setting interest rates or through open market operations. Lowering interest rates or purchasing debt (resulting in an increase in bank reserves) is called monetary expansion or monetary easing, whereas the opposite is known as monetary contraction or tightening. An extraordinary process of monetary easing is denoted as quantitative easing, whose intent is to stimulate the economy by increasing liquidity and promoting bank lending.
 Open-market operations (OMOs) concern the purchase and sale of securities in the open market by a central bank. OMOs essentially swap one type of financial assets for another; when the central bank buys bonds held by the banks or the private sector, bank reserves increase while bonds held by the banks or the public decrease. Temporary operations are typically used to address reserve needs that are deemed to be transitory in nature, while permanent operations accommodate the longer-term factors driving the expansion of the central bank's balance sheet. Traditionally, such a primary factor has been the trend growth of currency (notes and coins) in circulation. Among the temporary, open-market operations are repurchase agreements (repos) or reverse repos, while permanent ones involve outright purchases or sales of securities. Each open-market operation by the central bank affects its balance sheet.
 The central bank, or other competent, state authorities (such as the treasury), are typically empowered to create new, physical currency, i.e. paper notes and coins, in order to meet the needs of commercial banks for cash withdrawals, and to replace worn and/or destroyed currency.
 In modern economies, relatively little of the supply of broad money is in physical currency. In the United Kingdom, deposit money outweighs  the central bank issued currency by a factor of more than 30 to 1. In the United States, where the country's currency has a special international role being used in many transactions around the world, legally as well as illegally, the ratio is still more than 8 to 1.
 When commercial banks lend money, they expand the amount of bank deposits. 
The banking system can expand the money supply of a country beyond the amount created by the central bank, creating most of the broad money in a process called the multiplier effect.
 Banks are limited in the total amount they can lend by their capital adequacy ratios and, in countries that impose required reserve ratios, also by these. Reserve requirements oblige commercial banks to keep a minimum, predetermined, percentage of their deposits at an account at the central bank. Many countries in the world, including the United States, Australia, Canada and New Zealand, do not impose minimum reserve requirements on banks. This does not allow commercial banks to lend without limit, however, since there is still, aside from other considerations, the capital adequacy ratio.
 The maximum ratio of loans to deposits is the required-reserve ratio RRR, which is determined by the central bank, as
 where R are reserves and D are deposits.
 Whereas central banks can directly control the issuance of physical currency, the question to what extent they can control broad monetary aggregates like M2 by also indirectly controlling the money creation of commercial banks is more controversial. According to the money multiplier theory, which is often cited in macroeconomics textbooks, the central bank controls the money multiplier because it can impose reserve requirements, and consequently via this mechanism also governs the amount of money created by commercial banks. Most central banks in developed countries, however, have ceased to rely on this theory and stopped shaping their monetary policy through required reserves. Benjamin Friedman explains in his chapter on the money supply in The New Palgrave Dictionary of Economics that the money multiplier representation is a short-hand simplification of a more complex equilibrium of supply and demand in the markets for both reserves (outside money) and inside money. Friedman adds that the simplification will work well or badly "depending on the strength of the relevant interest elasticities and the extent of variation in interest rates and the many other factors involved". David Romer notes in his graduate textbook "Advanced Macroeconomics" that it is difficult for central banks to control broad monetary aggregates like M2.: 607–608  
 Monetarist theory, which was prominent during the 1970s and 1980s, argued that the central bank should concentrate on controlling the money supply through its monetary operations. The strategy did not work well for the central banks like the Federal Reserve who tried it, however, and it was abandoned after some years, central banks turning to steer interest rates to obtain their monetary policy goals rather than holding the quantity of base money fixed in order to steer money growth.: 464–465  Interest rates influence commercial bank issuance of credit indirectly, so the ceiling implied by the money multiplier does not impose a limit on money creation in practice. By setting interest rates, central-bank operations will affect, but not control the money supply.
 The fractional reserve theory where the money supply is limited by the money multiplier has come under increased criticism since the financial crisis of 2007–2008. It has been observed that the bank reserves are not a limiting factor because the central banks supply more reserves than necessary and because banks have been able to build up additional reserves when they were needed. Many economists and bankers now believe that the amount of money in circulation is limited only by the demand for loans, not by reserve requirements.
 The observation that there appears to be no limit to the amount of credit money that banks can bring into circulation in this way has given rise to the often-heard expression that "Banks are creating money out of thin air". The exact mechanism behind the creation of commercial bank money has been a controversial issue.
 The credit theory of money, initiated by Joseph Schumpeter, asserts the central role of banks as creators and allocators of the money supply, and distinguishes between "productive credit creation" (allowing non-inflationary economic growth even at full employment, in the presence of technological progress) and "unproductive credit creation" (resulting in inflation of either the consumer- or asset-price variety).
 The model of bank lending stimulated through central-bank operations (such as "monetary easing") has been rejected by Neo-Keynesian and Post-Keynesian analysis as well as central banks.
The major argument offered by dissident analysis is that any bank balance-sheet expansion (e.g. through a new loan) that leaves the bank short of the required reserves may affect the return it can expect on the loan, because of the extra cost the bank will undertake to return within the ratios limits – but this does not and  "will never impede the bank's capacity to give the loan in the first place". Banks first lend and then cover their reserve ratios: The decision whether or not to lend is generally independent of their reserves with the central bank or their deposits from customers; banks are not lending out deposits or reserves, anyway. Banks lend on the basis of lending criteria, such as the status of the customer's business, the loan's prospects, and/or the overall economic situation.
 Bank of England tells us in 2019: "Most of the money in the economy is created by banks when they provide loans.", but not every provided loan is heightening bank money amount. It depends on payment flows after given loans. (see table by Decker/Goodhart [2021] beside).
 
"Monetary financing", also "debt monetization", occurs when the country's central bank purchases government debt. It is considered by mainstream analysis to cause inflation, and often hyperinflation. IMF's former chief economist Olivier Blanchard states that:  governments do not create money; the central bank does. But with the central bank's cooperation, the government can in effect finance itself by money creation. It can issue bonds and ask the central bank to buy them. The central bank then pays the government with money it creates, and the government in turn uses that money to finance the deficit. This process is called debt monetization.  The description of the process differs in heterodox analysis. Modern chartalists state:  the central bank does not have the option to monetize any of the outstanding government debt or newly issued government debt...[A]s long as the central bank has a mandate to maintain a short-term interest rate target, the size of its purchases and sales of government debt are not discretionary. The central bank's lack of control over the quantity of reserves underscores the impossibility of debt monetization. The central bank is unable to monetize the government debt by purchasing government securities at will because to do so would cause the short-term target rate to fall to zero or to any support rate that it might have in place for excess reserves. Monetary financing used to be standard monetary policy in many countries, such as Canada or France, while in others it was and still is prohibited. In the Eurozone, Article 123 of the Lisbon Treaty explicitly prohibits the European Central Bank from financing public institutions and state governments. In Japan, the nation's central bank "routinely" purchases approximately 70% of state debt issued each month, and owns, as of Oct 2018, approximately 440 trillion JP¥ (approx. $4trillion) or over 40% of all outstanding government bonds. In the United States, the 1913 Federal Reserve Act allowed federal banks to purchase short-term securities directly from the Treasury, in order to facilitate its cash-management operations. The Banking Act of 1935 prohibited the central bank from directly purchasing Treasury securities, and permitted their purchase and sale only "in the open market". In 1942, during wartime, Congress amended the Banking Act's provisions to allow purchases of government debt by the federal banks, with the total amount they'd hold "not [to] exceed $5 billion". After the war, the exemption was renewed, with time limitations, until it was allowed to expire in June 1981.