Dr. Eswar Prasad

that you can use technology to make both domestic payments and particularly cross-border payments much more efficient much cheaper and easy to conduct basically in real time so stable coins are essentially doing what bitcoin was meant to do but doing it in a way that contravenes the libertarian principles underlying the creation of bitcoin

So central banks create some money, of course.

Those are the currency bills and coins that we use and love.

But what central banks really do is try to manage inflation in an economy.

And in the case of a central bank like the Fed, they also try to ensure

that the economy is doing well in terms of maintaining low unemployment and decent growth.

And they do this essentially by controlling the cost of funds.

Now, when you think about the interest rates that we usually care about, the things that affect our borrowing decisions for, say, house mortgages, car loans, and so on, those are really the long-term interest rates adjusted for inflation, what we economists call the real interest rate.

But what a central bank like the Fed actually controls is something very different.

It's just the rate at which banks lend to each other in the overnight market.

So it's a very short-term rate.

But by controlling that rate, the Federal Reserve or central banks like it are able to control the long-term cost of funds and thereby affect what happens in terms of economic activity and therefore also inflation.

A lot of money creation in modern economies is undertaken not by the central bank, as it turns out, but by commercial banks.

And it's a curious way to think about the creation of money.

But commercial banks are essentially creating credit.

So if I was to go out and take a mortgage for a house, the bank would create a loan and create a corresponding deposit, and that deposit

goes through the entire banking system.

So I might pay my contractor who might in fact pay for his subs using that money.

And eventually when the loan is extinguished, that money goes away.

So the central bank creates some money in economy and controls the cost of funds, but really it's the commercial banks that create most money in the modern economy.