How Do Banks Create Money?

How do banks create money out of thin air? THEY CAN'T DO THAT, CAN THEY? Yes they can, Dorothy, and they do. They create money from your promise to repay a loan ...that's how. Very simply put, when you go to the bank and get a loan for a house, car, or credit card you promise to repay the loan with interest by signing a contract. You create debt. The bank then takes that "promise to pay" to the Central Bank. They get at least nine times that amount on your piece of paper or your credit application. So the bank creates money from a piece of paper that you sign. In other words, banks create as much money as we can borrow. Most people do not know where money comes from. How does a dollar appear? Let's say that there is $400.00 in the total economy. Who makes the decision to change that number to $500.00? Most people would answer "the government" or "the central bank". These are good guesses, but they are wrong. The correct answer is: you do.

When you borrow a hundred dollars, those hundred dollars appear magically in the economy. They did not exist before you took out the loan and they will not exist after you repay it. The monetary system operates like this, somewhat simplified: a bank must have a certain fraction of its outstanding loans as savings accounts. That's called a "reserve". If that fraction is 1/9 (a common number), and you deposit $100 in a bank, that bank has the right to get $900 from the Central Bank and lend it to other people, at a higher interest rate. "...I am afraid that the ordinary citizen will not like to be told that banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hands the destiny of the people." Reginald McKenna Past Chairman of the Board, Midlands Bank of England.

Banks Lend Promises. In the real world, if you need a hammer and go to your neighbor to borrow the hammer, a piece of paper that promises to lend you that hammer does not work…. You need the hammer in the artificial monetary world; a promise to pay money that the banks dose not have is passed off as money. Banks do not lend money. They lend promises to supply money that they do not possess. So, if we can have no money without debt then if there is no debt then there is no money? That is exactly right. You might want to read that sentence again.

No Debt = No Money People like you create more than 95% of the money today by signing a piece of paper promising to pay back the bank for money that the bank never had to lend. That's not double talk, it is fact. Once upon a time when we were on the gold standard, we could only print money that equaled the amount of gold that the government had to back it up. Moreover, when we needed more money, we had to mine more gold. That is not true today. If you look on a dollar bill you will see that it says "Federal Reserve Note" and "This note is legal tender for all debts public and private".

Now you are confused, right? What exactly does Federal Reserve mean? Who are these people and how did they get involved? They are the people that print and regulate your money. Don't you think you should know who they are?

Do you remember when we talked about the Central Bank and how banks take your note to them and get at least nine times the note? This bank also is known as the Federal Reserve System or the "Fed". It prints all the money in the United States. Now the Fed is a very curious institution. Some people think that the Federal Reserve is a part of the government. We did research and here is what we found out.

"...I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around {the banks} will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. " Thomas Jefferson (1743 - 1826), Letter to the Secretary of the Treasury Albert Gallatin (1802).


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