[peterjancelis]

Of course, central banks control the money supply (both M1 directly and M3 indirectly by imposing reserve ratios on banks). Because absent competition, bad money drives out good, the reserve ratio basically imposes leverage on the banking system. That's why it blows up every decade or so but both the government and the banks prefer it this way: Governments can run deficits and monetize their debts (very useful for funding wars) while banks enjoy the rent seeking a regulated banking system allows.