Finally, consumers and businesses decide they want some of the money that The Banks have the capability to create. And The Banks happily accommodate.

The Banks buy 6,000,000 M-oz. of notes from borrowers. They also increase their deposit liabilities by 6,000,000 M-oz. as payment for these notes.

Notice the change in scale in the charts.

In response to the new capacity provided for them, The Banks started buying all the notes offered to them. They bought an additional 6,000,000 M-oz. in notes (or made 6,000,000 M-oz. in loans) and increased the quantity of money by another 6,000,000 M-oz. And they still have 100,000 R-oz. in excess reserves.

The last three periods demonstrate the separation of the actions of The Fed from the money creating actions of The Banks.

1. The Fed (in the first two periods) increased excess reserves by first reducing the required reserve ratio, then buying securities.
2. The Banks (in the last period) took action—without the participation or influence of The Fed—to buy more notes and expand deposit liabilities (and the quantity of money).

But, so far I have only shown transactions between The Banks and The Fed.…