What you will learn in this lesson
By the end of this lesson you will know exactly what the two terms repeated daily in economic news, the "monetary base" and "naqdinegi" (broad money, or liquidity), actually count; on which two levels new money is created; what the "money multiplier" measures; and why economists tie sustained money growth to inflation. A labelled hypothetical example walks through money creation step by step, and then dated real figures from the Central Bank of Iran for the end of the Iranian year 1404 show the same relationship at work.
Definitions
The monetary base, also called high powered money (in Persian «پایهٔ پولی» or «پول پرقدرت»), is the only money the central bank itself creates: banknotes and coins in circulation, plus the reserves that banks hold at the central bank. No commercial bank can add even one rial to this figure.
Naqdinegi («نقدینگی»), broad money or M2 in international usage, is the total money held by households and non government firms. It has two parts: money, meaning cash in people's hands plus demand deposits that can be spent immediately by card or cheque; and quasi money («شبهپول»), meaning term and savings deposits that must first be released before they can be spent. One point a beginner should accept right here: a very large share of broad money is not banknotes at all, but figures in bank accounts.
The reserve requirement («سپردهٔ قانونی») is the share of each bank's deposits that regulation requires it to keep at the central bank rather than lend out.
The money multiplier («ضریب فزایندهٔ نقدینگی») tells you how many units of broad money each unit of the monetary base has actually produced. Its definition is straightforward: broad money divided by the monetary base. So in any economy this identity always holds: broad money equals the monetary base times the money multiplier.
One unit of account is also needed: hemat («همت») is Persian shorthand for one thousand billion tomans.
The mechanism: where new money comes from
Money creation happens on two levels, and most misunderstandings come from mixing the two.
Level one, the central bank. The monetary base grows when the central bank's balance sheet grows: when the government borrows from the central bank, when a bank short of funds overdraws from the central bank, and when the rial value of the central bank's foreign assets rises. This level is the source.
Level two, the banking network. Banks take money from that source and multiply it. When a bank lends, it does not take money out of a depositor's pocket and hand it to a borrower; it writes a new figure into the borrower's account. That figure is a new deposit and therefore new broad money. The money is then spent, lands in a seller's account at another bank, and part of it is lent again. This chain is exactly what the money multiplier measures.
A worked example (hypothetical)
Suppose the reserve requirement is 10 percent and the central bank injects 100 million tomans of new monetary base. (These numbers are invented and used purely for teaching.)
The 100 million is deposited at Bank A. Bank A places 10 million at the central bank and lends 90 million. That 90 million is spent and reaches Bank B; Bank B sets aside 9 million and lends 81 million. Then 72.9 million, then 65.6 million, and so on, smaller and smaller.
The sum of all deposits created along this chain is 100 divided by 0.10, that is roughly one billion tomans. From 100 million of monetary base, one billion tomans of broad money was created, and the multiplier came out at 10. Note that nobody printed a banknote; nine tenths of this money is only a figure in accounts.
The real multiplier is always below this theoretical number, because some money stays outside the banking network as cash, banks hold reserves above the required minimum, and supervisory rules cap the growth of bank balance sheets.
In Iran's market
Now the same relationship with real figures. According to the Central Bank of Iran's report on monetary developments at the end of the year 1404, broad money at the end of Esfand 1404 (March 2026) reached 155,812.2 thousand billion rials, about 15,581 hemat, while the monetary base at the same date stood at about 2,196 hemat. Divide the first by the second and you get 7.095, which is precisely the multiplier the Central Bank reported for the end of Esfand 1404. The identity in this lesson holds, figure for figure.
The growth rates are just as telling: broad money grew 53.3 percent during 1404 (against 29.1 percent in 1403) and expanded by 5,415 hemat in one year, while the monetary base grew 61.5 percent, an increase of 836 hemat. The Central Bank attributed the jump to that year's exceptional conditions, including the two wars of Khordad and Esfand 1404, the need to support continued economic activity, and help with financing the government. It added that most of the growth in its net foreign assets (whose balance at the end of Esfand 1404 was about 6,142 hemat) came from a higher conversion rate applied to those assets, not from new foreign currency inflows.
What makes these numbers instructive is that they move in opposite directions: while the monetary base was accelerating, the multiplier was falling. That ratio stood at 7.434 in Bahman 1404 and, only a month later, at 7.095 in Esfand of the same year. In other words, the policy of controlling bank balance sheets did slow the speed at which money is multiplied, but it did not stop broad money from expanding, because the source was under greater pressure.
The central bank's most direct lever on that multiplier is the reserve requirement itself. Citing item (1) of the resolutions of the 61st session of the Monetary and Foreign Exchange Policy Council of 26 April 2026, the Central Bank raised the reserve requirement ratio for all banks and credit institutions in two stages of 0.75 percentage point each, 1.5 percentage points in total, with the second stage implemented on 23 July 2026. The stated aim was to manage liquidity growth and curb inflation. You can follow monetary decisions of this kind in the Sahmino events calendar.
Why money supply is tied to inflation
The basic logic is simple: prices are a ratio between the quantity of money and the quantity of goods and services. If the amount of money grows by more than fifty percent in a year while the economy's real output grows nowhere near that, more money queues up behind an almost unchanged quantity of goods, and prices have nowhere to go but up.
That transmission is not instant, however. New money first settles where reaction is fastest, typically in assets such as foreign currency, gold, equities and housing, and reaches consumer prices with a lag usually measured in months and sometimes several quarters. It is this lag that makes the relationship hard to see in the short run. For the next link in the chain, read the lesson on what moves the dollar, and for measuring inflation's effect on savings, the lesson on money, inflation and purchasing power.
Common mistakes
"Printing money" means switching on the banknote press. In practice banknotes are a small share of broad money. What grows are figures in accounts, both on the central bank's balance sheet and in the deposits banks create when they lend.
A large broad money figure means people have plenty of money. Broad money is a nominal number and grows every year in a high inflation economy. It only becomes meaningful when compared with inflation, with the size of the economy and with earlier years, never on its own.
Money growth shows up in prices tomorrow. The lag is real. The absence of an immediate effect is not the absence of an effect.
A falling multiplier means inflation has been contained. The 1404 data show otherwise: the multiplier fell, yet because the monetary base grew 61.5 percent, broad money still expanded 53.3 percent. Restraining the multiplication is no substitute for restraining the source.
Broad money and bank deposits are two separate things. On the contrary, your deposits are the main component of the country's broad money.
Summary
The monetary base is the source and the central bank creates it; broad money is the result of that source being multiplied through the banking network; and the multiplier merely reports the ratio between the two. To understand inflationary pressure you have to look at all three together, because a shrinking multiplier can mask rapid growth in the monetary base, exactly as it did in 1404. The previous lesson in this series, Gold Funds: How They Work, What They Cost, and Why the Board Price Drifts From NAV, looked at one of the very destinations where new money settles. The full lesson list is available in the Sahmino Academy section.
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