How Banks Create Money
The surprising truth: banks don't lend deposits—they create money with every loan
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0 / 5 completedThe Money Creation Myth
Most people believe banks act as intermediaries—taking deposits from savers and lending them to borrowers. This seems logical, but it's fundamentally wrong. Banks don't lend out deposits. They create brand new money every time they make a loan.
When a bank approves your $50,000 car loan, it doesn't check if someone deposited $50,000 first. It simply types "$50,000" into your account—money created from nothing. The loan is the asset (you owe the bank), and your new deposit is the liability (the bank owes you). Both sides of the balance sheet expand simultaneously.
❌ Common Misconception
- •Banks are intermediaries between savers and borrowers
- •Deposits are lent out to other customers
- •Banks need deposits before they can lend
- •Savings creates investment
✓ Reality
- •Banks are money creators, not intermediaries
- •Loans create deposits, not the reverse
- •Banks can lend before receiving deposits
- •Credit creates purchasing power instantly
Money creation is pure double-entry bookkeeping. When you get a loan: Debit: Loans (Asset) +$50k | Credit: Deposits (Liability) +$50k. The bank's balance sheet expands, and new money enters the economy. No vault, no reserves needed—just a keystroke.
Why This Matters
Official Confirmation
"The reality of how money is created today differs from the description found in some economics textbooks... Rather than banks lending out deposits that savers place with them, **banks create deposits when they lend**."