I’ve often wondered about this “myth” — here is an interesting article from a publication I didn’t know existed until just recently — The Epoch Times:
Contrary to Economics 101, credit markets beat money supply
BY JAMES H. NOLT, SENIOR FELLOW, WORLD POLICY INSTITUTE
If you take a standard economics course, such as macroeconomics or money and banking, you will learn that prices are regulated by government-controlled central banks using their power over something called “the money supply.”
Such textbooks rarely mention what happened before central banks existed (the U.S. Federal Reserve system was only created in 1913) or before they were nationalized and came under government control, as occurred with the Bank of England only in 1946. Furthermore, these courses’ descriptions of some of the key processes for typical central-bank operations are purely mythological, bearing no resemblance to reality.
Central banks do have influence—not control—over modern economies, but less for reasons of special legal privilege and more because they have large resources to sway markets. That is, if you understand the power of big banks in general, you will also understand the power, interests, and influence of central banks in particular. Few of the powers they exercise are unique to central banks in the sense that most textbooks claim.
Insofar as a central bank acts as the collective agent of the other large banks (assuming all are in rough agreement), its apparent powers are strongly due to its collaboration with other bankers. When a central bank faces the opposition of a faction of private banks, its power to act is seriously constrained, and its policies may be defeated, as happens often to the central banks of smaller countries and sometimes to those of larger ones.
Before we move on, we need to address a fundamental question: What is money? One thing everyone agrees is that coins and paper currency held by the public are money. However, in modern societies, those make up a small portion of the total money circulating in the economy.
Read more about the myth: The Epoch Times