Money creation.
In plain English
Most money is bank deposits rather than paper currency, and those deposits are created by the act of lending, since the loan and the deposit appear on the bank's books at the same time. The bank does not hand over someone else's savings, it writes two entries, an asset for the loan and a liability for the deposit. Repaying a loan reverses the entry and destroys that deposit money. Central banks create a different kind of money, reserves and currency, and they influence how much deposit money banks create through interest rates, capital rules, and liquidity requirements. Total money in the economy is the outcome of millions of lending and repayment decisions.
01Why it matters
Credit conditions, not a printing press, decide how much money exists, which is why lending standards at banks can tighten or loosen the economy as much as any policy announcement.
02The math, step by step
Say a bank approves a $250,000 mortgage. It records a $250,000 loan asset and credits the seller's account with $250,000. Deposits in the system just rose by $250,000. When the borrower has repaid $50,000 of principal, that much deposit money has been extinguished.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Physical currency is printed by the Bureau of Engraving and Printing, but it is a small slice of the money supply and is issued in exchange for reserves, not created out of spending. The bulk of money creation happens on commercial bank balance sheets through lending.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice