Who Creates Money?

Most people think the government prints all the money. That's only a small part of the truth. Here's what school never taught us: most money isn't printed at all. It's typed.

When a bank gives you a loan, it doesn't take cash out of a safe. Picture a $200,000 home loan. The bank simply types "$200,000" into your account. That money didn't exist a second earlier — the loan created it. In fact, most of the money in the world was made this way: by banks, as loans, with a few clicks on a keyboard.

For a long time, people told a simpler story. They said a bank takes your savings, keeps a little, and lends out the rest. That story is wrong. In 2014, the Bank of England said so plainly: banks don't lend out your savings — they create new money when they make a loan.

But banks can't make money without limits. There are rules for how much they can lend. The people who borrow have to be able to pay the loan back. And when a loan is paid off, that money disappears again.

Even so, the limits only slow things down. Every year, more money is created than removed — more money, but the same amount of real things.

Think of a pizza. Cut it into 8 slices and each one is big. Cut the same pizza into 80 slices and each one is tiny. The pizza didn't grow. The slices just got smaller.

Your savings are the slices.

Tomorrow: money used to be a cow — and that was a real problem.