How Banks Create Money

How Banks Create Money


Some people know almost nothing about the process of money creation. Others understand that new money gets created somewhere in the U.S. banking system, but can't say exactly where or how. And still others maintain somewhat misguided ideas about the role and influence of The Federal Reserve in the process of money creation.

This "presentation" gives a graphic illustration of how banks create money (with only an entry in a digital ledger). In our current banking system:

Banks Create Money

The Federal Reserve does not create money.

The Federal Reserve only sets the limits for money creation by influencing levels of excess reserves.


This presentation does not provide an exhaustive model of money creation. It should, however, provide you with a start for understanding the money creation process.

On the next page we lay out the objectives of this presentation