How Banks Create Money

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The money that banks create isn’t the paper money that bears the logo of the government-owned Bank of England. It’s the electronic deposit money that flashes up on the screen when you check your balance at an ATM. Right now, this money (bank deposits) makes up over 97% of all the money in the economy. Only 3% of money is still in that old-fashioned form of real cash that you can touch.

Banks can create money through the accounting they use when they make loans. The numbers that you see when you check your account balance are just accounting entries in the banks’ computers. These numbers are a ‘liability’ or IOU from your bank to you. But by using your debit card or internet banking, you can spend these IOUs as though they were the same as £10 notes. By creating these electronic IOUs, banks can effectively create a substitute for money.

The following video from the Bank of England explains how money is created by commercial banks:

In the video below Professor Dirk Bezemer at the University of Groningen and Michael Kumhof, an IMF Economist explain where money comes from in less than 2 minutes:

Every new loan that a bank makes in this way creates new money. While this is often hard to believe the first time you hear it, it’s common knowledge to the people that manage the banking system. In March 2014, the Bank of England release a report called “Money Creation in the Modern Economy”, where they stated that:

Bank of England - Money Creation in the Modern Economy

“Commercial [i.e. high-street] banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.” (Original paper here)

Sir Mervyn King, the Governor of the Bank of England from 2003-2013, recently explained this point to a conference of businesspeople:

Mervyn King, Governor Of The Bank Of England

“When banks extend loans to their customers, they create money by crediting their customers’ accounts.”

Sir Mervyn King, Governor of the Bank of England 2003-2013 (Speech)

And Martin Wolf, who was a member of the Independent Commission on Banking, put it bluntly, saying in the Financial Times that: “the essence of the contemporary monetary system is the creation of money, out of nothing, by private banks’ often foolish lending” (Article).

By creating money in this way, banks have increased the amount of money in the economy by 11.5% a year over the last 40 years. This has pushed up the prices of houses and priced out an entire generation.

Of course, the flip-side to this creation of money is that with every new loan comes a new debt. This is the source of our mountain of personal debt: not money that had been prudently saved up by pensioners, but money that was created out of nothing by banks and lent to people who could not repay. Eventually the debt burden became too high, resulting in the wave of defaults that triggered the start of the financial crisis.

Learn More


Bank of England - Money Creation in the Modern Economy

The Proof

The way that money is taught in universities is often very inaccurate. These papers and sources from central bankers and other experts show how the system really works.


How We Got Here

The laws that make it illegal for you to print your own £5 or £10 notes have been in place since 1844. But these laws have never been updated to account for the fact that 97% of money is now digital.


How Much Money Have Banks Created?

From the time when the Bank of England was formed in 1694, it took over 300 years for banks to create the first trillion pounds. It took them only 8 years to create the second trillion.

The Technical Details

Banking 101

Video Course: Banking 101

This free animated video course (total 57 minutes) explains how the modern banking system creates money, and what limits how much money banks can create.

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Advanced: All the technical details

This section covers all the nitty-gritty details of money creation by banks. We cover the three types of money, how balance sheets work, how central and commercial banks create – and destroy – money and what is wrong about the textbooks taught in universities. Read more…



Book: Where Does Money Come From?

“Refreshing and clear. The way monetary economics and banking is taught in many – maybe most – universities is very misleading and this book helps people explain how the mechanics of the system work.”

Professor David Miles, Monetary Policy Committee, Bank of England

Modernising Money Cover Web 300px

Book: Modernising Money

Why our monetary system is broken, and how to fix it. 

“Money is a social invention, indeed among the most important of all social inventions. At present the right to create money has been handed over to the private businesses we call banks. But this is not the only way we could create money and, as recent experience suggests, it may be far from the best one. Read this book with an open mind and you will understand why.”

Martin Wolf, Chief Economics Commentator, Financial Times

Further Resources

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Papers and videos from:

  • The Bank of England
  • The International Monetary Fund
  • Lord Adair Turner, former chairman of the UK’s Financial Services Authority
  • Other professors and experts in the monetary system

Find out more

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  • Islam Hussen Pakhtoon

    I am the one teaching people that the way to destroy a society is to copy its wealth over and over again and amazingly britain is copying wealth but not the wealth of it enemies or so called enemies who I believe are not really enemies but innocent people, but are copying its own wealth. Britain is destroying itself, very strange for a country thats meant to full of people of intelligence. How hilarious a country that is destroying itself. Goes back to Islam, there is is no benifit in interest based transactions. This article is really hillarious I might store this for later references when I feel depressed.

    • Makanda62958

      Christianity used to prohibit interest, Jesus turned over the tables of the usurers in the temple. Islam could just as easily become corrupted after the wars against you conclude. Laughing because we cannot cry.

      • Wocca

        Fear not, Islam does charge interest, it’s just couched in other terms. A home buyer in the UK will pay roughly the same for his loan whether he uses an Islamic bank or a Christian Bank.

    • Wocca

      It may well go back to Islam but the fact remains that there is no Islamic country that creates the wealth that the world’s interest based transactions countries have. The wealthy Islamic countries that do exist are only wealthy because they sell oil to the countries that have interest based transactions.

      • Freeflight

        At least oil wealth is based on a real and tangible good, something you can touch and actually use.

        “Western wealth” on the other hand, slowly seems end up being just a big scam. Most of it based on fiat money and cooking the books, with no real economic gain or worth behind it.

  • Are You Kidding Me?

    Good grief. This is basic economics 101. There are no first year college economic students who dont understand that the banking system creates money through lending. And the central banks control the multiplier via the reserve rate. This is normal banking business and has been so for centuries. It isnt nefarious… it’s just good common sense. Duh.

    • Mira Tekelova

      The problem is:

      1) the ‘money multiplier’ is an inaccurate and outdated way of describing how the banking system works. Please see our video: “What’s wrong with the money multiplier model”.

      2) the type of reserve ratio that’s discussed in the textbooks has never even existed in the UK

      3) the central banks have actually very little control over the money supply.

      Please see:

    • Gunzo

      Well, it is nefarious because the excessive lending caused hiccuups and the bankers were not squeezed out and the federal govt had to step in. And we did not audit the Fed.

    • Malc Cowle

      They make the money – but working people, along with Mother Nature, create the wealth – including THEIR capital – i..e., the means of production. And if anybody can prove me wrong I will show my bare backside in Primart’s front window in Market Street, Manchester. It IS basic economics – time for you to read William Petty, the man Adam Smith plagiarised.

  • sharif

    Thanks.but I want to know more about that.any reference for this? Please
    Share this….

  • Paddy

    See old problems, what what is your solution proposition

  • sanba

    i cant understand this if banks create credit as loan and give it to me wont the credit be canceled when i pay my debt back so if thats the case how can the 97% of money be bank made?? for ex i take 200$ from the bank as credit wont i have to pay the 200$ in interest cancelling out the “nothing made credit”? and also can some one explain if banks create money why do they need deposit money ??

    • David Nicholson

      I don’t think so. Someone correct me if I’m wrong, but credit is money created out of thin air, and once that money is paid back it isn’t destroyed, but put back in the bank along with the interest as profit.

      • Wocca

        The original loan, when it is paid back, will no longer exist. The bank has to pay down the original loan with the money repaid to it by it’s customer.

        • Wackfuk

          Not so sure about that. Doesn’t clarify that in the wiki article. The whole point is to create new money to counter act deflation.

          • Graham Hodgson

            The reason bank-created money has grown to 97% of the money supply is that banks create new deposits by creating new loans faster than borrowers destroy existing deposits by repaying existing loans.

            Almost all of the interest collected by banks is paid out again by the banks in the form of interest to depositors, salaries, dividends, bonuses and purchases of goods and services by banks.

          • Wackfuk

            So when a bank loan is repaid the money is effectively destroyed in the same way it is created when the loan was created. No? And central bank reels in the money supply by highering Interest rates which make loans less attractive to customers and so slowing down the amount of new money a bank can create.

    • Freeflight

      The bank will keep the credit and the interest, that’s also the most fundamental flaw of the system.

      97% of money is sitting around generating “new money” in the form of interest. But this “new money” isn’t really worth anything, after all no real economical worth has been created trough this interest. Nobody did build anything, nobody invented anything, but this money still needs something to “cover” it or else inflation will make it worthless.

      In the end, the rest of us (those that actually live of the 3% money that’s circulating real economies) have to earn less, work harder and spent even more so these insane amounts of money gonna keep their actual buying power.

      Because high finance and speculators do not invest their 97% of fake money into real economies. These 97% of money are not used to buy goods and pay services, these 97% are only sitting on bank accounts, generating new interest.

      The real economies are missing this money in the form of buying power, yet they are responsible for “keeping up” so the whole system doesn’t break together under it’s own weight.

    • mo

      Imagine a bank loans 10 people $1 and charges all of them 10% interest. All of them need to pay back $1.10. Where does the extra dollar come from?

      • Wackfuk

        The peoples pocket.

      • Ross Lewis Flynn

        from another loan with more interest, and then agian and again and again. thats why there is alway more debt than money.

  • Robert

    This is very misleading!
    Yes banks can credit the borrower’s account, which on the surface will increase the bank’s balance sheet but as soon as the borrower spend that money eg by a cheque to another bank, the bank will have to transfer an amount from their reserves to the other bank. There is no creation of money here its just an accounting entry.
    Even if the money stays in the same bank then the accounting entry will be to debit the borrowers bank account and then credit the beneficiary’s account. There is no new money here.
    Banks lending is limited to the amount of their reserves – reserve accounts or vault cash

    • Carl

      I agree this website is nothing more than propaganda. Base money can only be created by central banks

      • Robert

        banks can only ‘create money’ if they have reserves ie deposits from customers/wholesale markets.
        the way it is portrayed in this piece is that banks can create money regardless.
        As soon as the customer makes a payment from their account with borrowed money, the bank will need to transfer their reserve account money to the beneficiary’s bank.

        • Graham Hodgson

          This is a very narrow view of money and is not how banking works. It has long been known that the amount of reserves in existence has no bearing on economic activity. That is why all monetary authorities use some aggregate of the balance of customers’ deposits as their preferred measure of money. Banks create deposits when they lend to customers. This increases the measure of money. Those newly created deposits pass to other banks when the loans are spent. In the case of the vast majority of transactions, reserves are transferred only periodically and only after all deposit transfers for that period have been completed and net balances established. Reserves are just the accounting tokens used to keep all banks’ balance sheets in balance at period-end. But precisely because reserves don’t accompany payment, banks have to constantly scramble to borrow and rent out from the limited stock of reserves to meet their end-period settlement obligations and this is the destabilising mechanism which makes bank bailouts mandatory when it falters.

        • Frank

          Banks can ‘create money’ by leveraging ‘reserves’. If you put €10 in a bank the bank can then ‘create’ or lend to someone else +€100.. this gets out of hand very quickly and that’s where the problem lies. Banks are in it for the profit just like a lot of individuals are. A committee as these people propose, would (ideally) look after the greater good of everyone/the system.

  • Can

    I do wonder how international payment systems work. Say, US imports goods from China and pays for them with USD. What happens if Bank of China intervenes? What happens if it does not? Can you help me go through this transaction through use of balance sheets of economic agents?(Importer, Exporter, Chinese bank, US bank, FED, Bank of China) What happens to bank reserves in US? Thank you?

  • regnaD kicN

    Don’t forget “fractional Interest.” By law, banks can lend up to 10 times their worth. If the loan isn’t repaid, the banks still have next to nothing to worry about as the other many fractional interest loans will make up for the shortfall (and also being able to write off the debt) not to mention being bailed out by the federal government if things really get bad, like in the 1986 S&L crisis or the 2008 financial meltdown. It’s a win-win situation for the banks, but for the average citizen it’s a lose-lose situation due to interest and inflation eating up their paycheck’s value.

  • Rubicon

    This is a bit naive and not actually true in some areas. Central banks are not owned by the governments, they are in effect privately owned banks which loan money, created out of nothing, to the government at interest. A large proportion of your income tax goes to pay the interest on the national debt (money borrowed from the central banks) and hence into hands of those who control the central banks. All western nations and most of the world is in this system, this book is a good explanation of this system. High street banks do indeed create further money out of nothing at interest (10x bank deposits), but this goes further. These loans, once paid into another bank after purchase something with this money, allows the receiving bank to again lend 10x on the original loan and so on massively increasing debt levels. The money for interest payments is however never created, so the only way the system can survive is by creating more and more debt to pay the interest. In a recession, there is less money created (new loans) for interest payments, therefore re-possessions and defaults ( bankruptcies ) increase dramatically and the banks take control of real assets, with money created out of nothing. This all carries on until the inevitable collapse of the system. This is just a brief summary.

  • n k prasad

    I am agreeing that money from banks by online, Debit & Credit cards are true money The black/fake currency will be controlled which is weakening the national money including the hard work of loyal citizens. Every moralized citizen has to fight against the financial Terrorism.

  • Nick Hoggard

    Is an IOU for £1 really worth the same as a £1 note?

  • radovas

    i see such difference of opinions and such knowledge in here, that it would be wonderful, if your beautiful minds, should work toward the essence of the problem…to have a biggest percentage of “production” capital and lower one on “investment” capital…to make money more real, more valuable, more accurate…more productive…that is the bottom line….

  • Sky Wanderer

    Parts of a recent publication by the Bank of England:

    “Of the two types of broad money, bank deposits make up the vast majority — 97% of the amount currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.” (p.15)

    Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers.

    By definition, ‘buying’ assets from created, new money is theft.

  • Ben

    In the Original paper, The third bullet point at the top of page 1 says…

    The amount of money created in the economy ultimately depends on the monetary policy of the central bank.

    How strongly can this be disputed and what are the chances of convincing the BoE to stop using such language assuming it can be shown to be false

  • aleena rose

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  • Arriemoller

    Don’t worry guys, bitcoin will fix that.

  • Peter Martin

    The crunch issue for all banks is that they do have, from time to time, to back up the money they have created supposedly “out of thin air” with real government money. The mistake which I think many are making is to assume that bank created money, created when loans are issued, stays in the economy until that loan is repaid. It doesn’t.

    Suppose I borrow £1000 from my bank. The bank edits my account to show that extra money. So its just been created. “Out of thin air”! Fair enough. I then write out a cheque for £1000 to the taxman. The taxman puts the cheque through the clearing system but he doesn’t want bank money, bank IOUs, he wants real government money. The bank supplies this from its reserves. At the same time it edits my bank account downward so eliminating the newly created “money”. I still owe the bank £1000.

    This would be relatively unusual but possible. A more usual scenario would be that a bank would lend money to a business, say a builder, who would hire bricklayers, joiners, buy raw materials etc for his building project. Every transaction would attract the usual government taxes. Income tax. VAT, NI contributions, Corporation tax etc. As the newly created money is spent and respent it rapidly dwindles until there is nothing left. It has nearly all gone to the government’s taxman who doesn’t want the money as it was originally created. He insists that those banks convert their IOUs to government IOUs.

  • Daniel Norman

    I was telling the guys at work about this and someone asked me the following question which I simply couldn’t answer, “If the banks genuinely create money out of thin air, why was the financial crisis caused by people defaulting on their debts? If the money was simply created from nothing, the bank would have no dependency on it and failure to repay the principal would have no impact.” Can anyone give a plain English answer to this for me?

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