How is new money generated?
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Contrary to popular belief, the money supply is not usually increased simply by printing more money. New money is printed every year, but primarily only to replace old and destroyed notes that are coming out of circulation. The fact is that in the modern economy, most money is “virtual,” existing only on the account books of banks and other financial institutions. The total money supply (M2) of US dollars as of 2021 is estimated at about $22 trillion, but only about $2 trillion of that is actual notes and coins.
So in actual practice, central banks like the Federal Reserve can manage the money supply by setting banking regulations (interest rates, reserve requirements, etc.) and by trading with financial institutions (“open-market operations”). This is where it gets pretty complicated and frankly goes over my head, but the upshot is that when commercial banks loan money to people and businesses, the money supply increases.
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