Commercial banks (the places where you and I bank) and the central bank (the Federal Reserve, in the US) both participate as needed in maintaining the money supply. Some people take this to mean that banks decide how much money there is in the country, which could be considered either true or false, depending on what one means by “money”. I’ll put it plainly: banks aren’t deciding how much wealth there is in the country, because the workforce does that by producing output. Banks are deciding how many dollars there are in the country, the units by which we measure that wealth.
Commercial banks add dollars to the money supply whenever they make loans. When they lend money, they don’t actually give the borrower money they have in their possession. They just enter the loan amount on their balance sheet while doing the lending, literally creating the money on the fly.
Consumers are unpredictable, and it’s plausible that borrowing can occasionally slow down enough that banks can’t create enough money to cover payroll at the rate required. In that situation, the central bank gets involved to keep things looking good, through “quantitative easing”. The central bank “buys” financial instruments to inject cash into the system the commercial banks would be creating if the demand for loans was higher. Where does the Fed get its money? The same place the commercial banks get theirs when they make a loan… they invent it. It is sometimes referred to as “printing money”, and it sounds more unrestrained than it actually is.
It’s important to know one thing: Neither the commercial banks nor the central bank are flippantly adding arbitrary amounts of money to the mix. They’re adding money that people are earning. In the case of commercial banks, the created money matches what people are legitimately borrowing. By “legitimately”, I mean a bank approved the loan because the borrower was vetted and found capable of repaying the loan given what they were expected to continue earning. In the case of central banks, it is meant to make up the difference between the (reduced) amount of borrowing going on and the amount of earning that is happening.
While the obvious minimum requirement is to cover payroll, it is also standard money supply policy to maintain a targeted amount of inflation. This incentivizes spending and disincentivizes saving. That is a built-in, surreptitious transfer of wealth from laborers to proprietors. Prices of goods adjust to inflation immediately, but salaries are infrequently adjusted for inflation. When was the last time your wage/salary got a “cost of living” adjustment?