gold found in the natural environment – these are liabilities issued by authorised deposit - taking institutions ( adis ) and other financial intermediaries. [ 2 ] broad money in australia is currently around $ 2 trillion or 115 per cent of the value of annual economic output as measured by nominal gdp ; most of that is in the form of banking deposits. over the past decade, the share of broad money represented by term and other bank deposits has increased in importance at the expense of holdings of current deposits and other borrowings from the private sector. how is money ‘ created ’? australia's banknotes are produced by the reserve bank of australia and account for most ( about 95 per cent ) of the value of australian currency. the rest is accounted for by coins produced by the royal australian mint. banks purchase banknotes from the reserve bank as required to meet demand from their customers and, in turn, the reserve bank ensures that it has sufficient banknotes on hand to meet that demand. previous research by the reserve bank points to a number of drivers of demand for banknotes. the most important is the size of the economy. [ 3 ] this is consistent with people holding some fraction of their income in this most liquid form of money in order to undertake transactions. [ 4 ] some share of demand is also accounted for by the desire for a liquid store of wealth. the value of banknotes in circulation as a share of nominal gdp has actually increased over recent years ( to around 4 per cent ), which suggests that this source of demand has grown strongly. https : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 09 - 19. html 3 / 16 20 / 09 / 2018 money – born of credit? | speeches | rba this increase has been observed in a range of countries and is consistent with the low level of interest rates, which has reduced the opportunity cost of holding money ( compared with holding interest - bearing deposits ). when customers withdraw currency from an atm or a bank branch, the value of their deposit holdings declines and the value of their currency holdings increases. the stock of broad money, however, is unchanged. as i mentioned earlier, the vast bulk of broad money consists of bank deposits. these banking liabilities are created when an australian household or business has funds credited to their deposit account at an australian bank. one way this can occur, for example, is when a business deposits currency it has earned with its bank. again

per cent to around 50 per cent of banks'balance sheets. [ 11 ] currently, a sizeable share of banks'liabilities is in the form of bonds on issue – a source of funding that was less important in 1980. [ 12 ] banks also have a much larger share of ‘ other liabilities ’ ( such as those to non - residents and related parties, which are not included in domestic monetary aggregates ). graph 6 looking back, it is clear that there have been many instances of sustained gaps between the growth of deposits – and broad money more generally – and the growth of credit ( graph 7 ). while broad money growth outpaced credit growth for most of the period since the financial crisis, this was not the experience of the two decades or more prior to the crisis, when credit typically outpaced broad money. https : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 09 - 19. html 10 / 16 20 / 09 / 2018 money – born of credit? | speeches | rba graph 7 this long history suggests that we should not be concerned about a so called deposit ‘ funding gap ’. some commentators have suggested that the recent decline in the growth rate of money has left banks with insufficient deposit funding to support credit growth. according to this hypothesis, banks have been forced to seek other forms of funding, including from short - term money markets, which, so the argument goes, can help to explain the notable rise in rates in those markets in recent months. what are we to make of this hypothesis? first, such a gap between the growth of deposits and credit has been commonplace over recent decades – and conditions in short - term money markets were benign through much of those earlier episodes. second, loans are not the only assets on banks'balance sheets ; indeed, in recent quarters, growth in these other assets has been particularly slow – slower than both credit and deposits ( graph 8 ). so deposit growth has more than matched the growth in total assets. https : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 09 - 19. html 11 / 16 20 / 09 / 2018 money – born of credit? | speeches | rba graph 8 third, if some banks really did have insufficient deposit funding, we would expect to see them competing more vigorously for deposits by raising interest rates on those products. but retail deposit rates have been flat to down over