You are both right. When it comes to the Money Supply economists talk about M0 which is actual currency issued by the federal reserve (or your countries equival

You are both right. When it comes to the Money Supply economists talk about M0 which is actual currency issued by the federal reserve (or your countries equivalent). Then there are M1 to M3 which are count increasingly less hard money and those do consists of money created when banks lend money in the fractional reserve system. Banks can only lend money when people deposit so in this way you are both right. For more see the wikipedia Money Supply page: http://en.wikipedia.org/wiki/Money_supply http://en.wikipedia.org/wiki/Money_supply