(Note: this post is not about physical cash or coin, which I trust most people correctly understand to be minted by the government. It is instead about a more complete measure of money in all its physical and non-physical forms: cash, coin, demand deposits, savings, etc.)
Courtesy of Dan Hind here's a simply explanation of how money is created:
Banks create money through the act of lending it. They don't have to limit themselves to lending out the money deposited with them. In fact, they can end up lending huge multiples of the money they hold in reserve.
When they authorise a loan or extend credit in the form of an overdraft, the money is conjured out of nowhere.So there you have it. Banks create the vast majority of the money supply out of thin air (electronic bits these days) when they make loans. Simple, right? Here's Dan again:
The economist and ironist JK Galbraith once wrote that "the process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent". Offered the unadorned truth, stripped of any technocratic flim-flam, we can scarcely believe it. It seems preposterous that money should have such humble origins, as though it is beneath money's dignity that it should begin life at a banker's keystroke.
The truth about money creation is a bit like the end of The Wonderful Wizard of Oz, when it turns out that there is no all-knowing wizard, only an old man behind a curtain, making things up as he goes along.A perhaps more interesting question is why the subject of how money is created is not taught in secondary school? The reason can't be that it's too complicated. But as one of the commenters on Dan's article notes:
"it is truly preposterous how little the public knows about arguably the single most influential conception humanity has ever created."Education Site: Educate yourself on various aspects of the financial industry with classes from accredited online colleges.
