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Monetary theory has been developed to show that money supply is a result of decisions among alternatives. Taking money supply as an exogenous given amount or a fixed multiplier of a government decided money base oversimplifies a complex process and hides the role played by other variables, i.e. the public and the banking community.

The present paper studies the process of money supply in the Saudi  economy for the period 1970 – 1989. It introduces several factors that are expected to affect the decisions of the public and commercial banks with regards to the holding or “making” of money. Thus, the money supply equation becomes  a function of these variables, which are deduced from a theoretical model and then tested through two-stage least squares.

The results show that several variables do play a significant role in deterring the Saudi money supply. The relationship between bank deposits and currency in circulation of bank reserves are not fixed or given, but change and are significantly affected by several variables such as economic stability, income, and the spread of banking institution.