In the previous chapter we saw that modern money consists of two components: (i) demand deposits with the commercial banks; (ii) notes. Of these the first, and most important component, consists of liabilities of the
, the second of liabilities of the
. Since we have defined the money supply as:
the nominal value of demand deposits and notes held by the non-bank public
it follows that, to explain its determination, we must examine the behaviour of the commercial banks and the central bank, for, just as an individual controls the nominal value of the IOUs he or she issues, so do banks and, in doing so, the latter control the money supply.