The Term "Base Money" Is Used because upon the Base of Base Money Sits a much Larger Pyramid of Credit; It Is Incorrect to say that “Banks Create Money”; Only the Federal Reserve Creates Base Money; Banks Can Only Create Credit

The money that is created by the Fed’s magic checking account is known as base money and consists primarily of Federal Reserve Notes (i.e., paper currency, dollar bills) and bank reserves, which are deposits of commercial banks with the central bank and are recorded electronically at the central bank. Only the Fed can create base money, and the Fed can create no other type of money except for base money. Paper bills make up the majority of base money. . . .

The term base money is used because upon the base of base money sits a much larger pyramid of credit. A bank deposit is not money, but is actually a kind of debt instrument, a bond that must be repaid at the request of the lender, called the depositor. As a bond, it pays interest. While the amount of base money available is determined to the dollar by the central bank (at least insofar as bills are not destroyed or lost by their holders or created by counterfeiters), the amount of existing credit can change according to a nearly infinite number of factors.

Thus it is incorrect to say that “banks create money.” Only the Federal Reserve creates base money. Banks can only create credit, which does not alter the supply of base money, but which may have an effect on the demand for base money. Actually, anyone can create credit, simply by making a loan. Credit is not money.

--Nathan Lewis, Gold: The Once and Future Money (Hoboken, NJ: John Wiley and Sons, 2007), 49-50.