How Is Money Created?

Ask most people where money comes from and they picture a money printer: a huge machine in a government basement, spitting out sheets of twenties while someone in a lab coat checks the ink. The money printer is real. It is also the least important machine in the story. Most new dollars are made by a loan officer pressing Enter, between bites of a turkey sandwich. The money printer mostly replaces worn-out bills, like the guy hired to dust the trophies.

Most new money is created by ordinary commercial banks when they make loans. When a bank lends you $30,000 for a car, it does not hand over someone else’s savings; it types $30,000 into your account, and that deposit is new money. When you repay the loan, that money disappears again. The central bank, the Federal Reserve in the US, creates a separate kind of money called reserves, which banks use to pay each other, and it steers how much lending happens by setting interest rates. Paper cash is printed by the government, but it is only about a tenth of the money Americans hold.

Where does money come from, if not the money printer?

Start with the cash, because it is the part people can hold. In August 2026 there was $2,475.6 billion of US paper money and coin in circulation, according to the Federal Reserve. That sounds like a lot until you set it beside the money Americans actually hold, the measure economists call M2: checking accounts, savings accounts, small certificates of deposit and cash, together. M2 was $23,342.8 billion. Cash is about a tenth of it. The other nine tenths is numbers in bank accounts.

Spread evenly, the cash in circulation comes to about $7,200 for every American. Check your wallet. Then the couch cushions. Then the cup holder in the car. You’re still about $7,180 short.

And the cash does not arrive first. The Bureau of Engraving and Printing prints notes because the Federal Reserve orders them, and the Fed sends them out because banks ask for them, because their customers want to withdraw. A bank that orders $1 million in twenties pays for them out of its account at the Fed. The cash is a swap: digital money goes out, paper money comes in, and the total stays the same. The money printer is less a factory than an ATM for the whole country, and like every ATM, it only hands out money that was already sitting in somebody’s account.

So the interesting question is where the numbers in the bank accounts come from. For a long time the textbook answer was wrong, and in 2014 a central bank said so in writing.

How do banks create money when they lend?

Call her the Loan Officer. She is not a real person; she is a composite of the people at every bank branch who decide, between nine and five, whether you can have the car. She has a mug that says WORLD’S OKAYEST BANKER and a printer that jams on Thursdays. On a Tuesday morning she approves your $30,000 car loan.

Here is what most people imagine happens next: she walks to a vault, or at least to a spreadsheet, finds $30,000 that a saver deposited last week, and passes it to you. Here is what actually happens. She enters the loan. The bank’s books now show an asset, your promise to pay back $30,000, and your account shows a new deposit of $30,000. Nobody’s savings went down. The $30,000 in your account did not exist at breakfast.

Britain’s central bank said exactly this in writing. In a paper published on March 14, 2014, three Bank of England economists put it in one sentence: “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.” Banks, it added, “do not act simply as intermediaries” lending out savers’ deposits. The paper ran in the Bank’s own quarterly magazine, which is like confessing in the church newsletter, between the bake sale and a reminder about parking.

The easiest way to picture it is the whiteboard on the fridge in a shared apartment. Sam covers the pizza, so his roommate writes “I owe Sam $20” on the board. Nobody brought new money into the kitchen. But there is now a $20 debt and a $20 claim that weren’t there at lunch. And if the downstairs neighbor will take Sam’s claim for his share of the electric bill, it is working as money.

A bank loan is two notes on the whiteboard at once. Yours says “I owe the bank $30,000.” The bank’s says “the bank owes you $30,000,” and the bank calls that one your deposit. Yours is a car loan. The bank’s is money, and the cashier at the grocery store takes it without even looking up.

You then spend the $30,000 at the dealership, and the deposit moves to the dealer’s bank. It does not vanish. It just drives off the lot in the opposite direction from the car.

Don’t banks need deposits before they can lend?

The old textbook story, the one many people learned in school somewhere between the food pyramid and the unit on Pluto being a planet, was the “money multiplier”. A saver deposits $100. The bank keeps 10% in reserve, as the law requires, and lends out $90. That $90 gets deposited at another bank, which keeps $9 and lends $81, and so on, until the original $100 has become $1,000 of deposits. Ten times the reserve, like a chain letter with a calculator.

Two problems. The first is the order of events: as the Loan Officer just showed, the loan comes first and the deposit second. The second is the 10%. On March 15, 2020, the Federal Reserve announced that it had cut the reserve requirement for US banks to zero percent, effective March 26, 2020. It has stayed at zero. A multiplier built on dividing by the reserve ratio now divides by zero, and any calculator will tell you what that gets you: the word ERROR.

That does not mean a bank can lend without limit. What stops it is duller and more real:

• Borrowers. A bank can only lend to people who want to borrow and look likely to pay it back. A loan that defaults is a loss.
• Capital rules. Regulators make banks hold their own money, shareholders’ equity, against their loans, so a bank that lends recklessly runs out of room.
• Interest rates. The Federal Reserve sets the rate at which banks borrow overnight, and that ripples through to every car loan and mortgage. Raise it, and fewer people want to borrow.
• Payments. When the dealer’s bank receives your $30,000, the Loan Officer’s bank has to settle up with reserves. Lend much faster than its rivals and a bank keeps losing reserves to them.

Into the weeds: why the old textbook isn’t completely wrong

The money multiplier is a fair description of a world that existed: one where reserves were scarce and the central bank controlled the quantity of them tightly. In that world, a shortage of reserves really could hold lending back. Since 2008, US banks have held far more reserves than any rule required, so the quantity of reserves stopped being the thing that limits lending. The price of borrowing, the interest rate, does that job now. The Bank of England paper made the same point: the amount of money created “ultimately depends on the monetary policy of the central bank”, mainly through interest rates.

What does the Federal Reserve do?

The Fed creates a different kind of money, called reserves: deposits that banks hold at the Fed and use to pay each other. You and I cannot have an account there. Think of reserves as the money banks use among themselves, the way a casino’s chips only work at the tables.

The Fed creates reserves by buying things, mostly government bonds. When it buys a bond, it pays by typing new reserves into the seller’s bank’s account. It has no pile of money to spend; the purchase itself is the money. In large amounts this is called quantitative easing, a phrase that means “buying bonds with money created for the purpose” and was chosen, presumably, because that sentence is too long for a press release.

Watch it over time. The Fed’s balance sheet, everything it owns, was about $0.87 trillion in August 2007. By April 13, 2022 it was $8.97 trillion, roughly ten times bigger in under fifteen years, the kind of growth spurt that has the pediatrician asking what you’ve been feeding it. On October 14, 2026 it stood at $6.76 trillion. Each of those trillions was paid for in reserves that did not exist before the Fed bought something.

When the Fed buys a bond from a pension fund or an insurer rather than from a bank, the seller ends up with a new bank deposit as well, so quantitative easing creates ordinary money too, not only reserves. That is one reason the money supply grew so fast in 2020 and 2021.

How much money did the US create after 2020?

A lot, and quickly. M2 was $15,492.8 billion in February 2020, the month before the pandemic closed most of the country. By February 2021 it was $19,641.4 billion. It peaked at $21,788.1 billion in March 2022, 40.6% higher than two years earlier. Government relief payments, a burst of borrowing and the Fed’s bond buying all pushed in the same direction at once.

Then something unusual happened. As the Fed raised interest rates and people paid down loans and moved money into Treasury bills, M2 shrank, to $20,798.9 billion by June 2023. Money can go backward. It just does it about as often, and for about as long, as a toddler handing back a cookie: by August 2026, M2 was $23,342.8 billion, about 51% above February 2020. That’s about $7.85 trillion of new money, about $23,000 for every person in the country: roughly a small new car for every man, woman and child in America, except nobody got the keys.

For comparison, the world’s gold supply grows at the speed of mining. Mines produced 3,671.6 tonnes of gold in 2025, according to the World Gold Council, which adds about 1.7% to all the gold ever dug up. Over the six and a half years in which US money grew about 51%, the world’s gold grew about a tenth. One of them can be typed by a loan officer before lunch. The other has to be dug out of a mountain by someone in a hard hat, which is a much slower way to make a deposit. (How much gold there is, and who holds it, is its own story.)

What happens to money when you pay off a loan?

It disappears, like the sheet cake at an office birthday party: one minute it’s the center of attention, the next there’s only a plastic knife and some frosting on a paper plate. When you make the last payment on the car, the bank takes $30,000 out of your account and crosses the $30,000 loan off its books. Both notes come off the whiteboard together. The Bank of England paper made this point too: just as a new loan creates money, repaying one destroys it.

This surprises people more than anything else here. The amount of money in an economy is roughly the amount of bank lending that has not been paid back yet. When people and businesses borrow more than they repay, money grows. When they repay more than they borrow, as many did during the 1930s, it shrinks. The money supply is less a reservoir than a running tab, like the bar tab at a wedding: it grows every time someone orders, shrinks only when someone pays, and nobody at the table knows the total.

Is this a bad thing?

Not necessarily, and the fair case deserves a hearing. A money supply that grows with lending can stretch to fit a growing economy, which a fixed supply cannot. Deposits are backed by loans and other assets, regulators require capital, the FDIC insures accounts up to $250,000, and for most of the years since the 1990s US prices rose about 2% a year. The system mostly works, most of the time, and the people running it are not printing money for fun.

The catch is what “mostly” covers. Money that can be typed can be typed faster than goods can be made. When it is, prices rise: US consumer prices rose 9.1% in the twelve months to June 2022, after the fastest money growth in decades. Every kind of money in this story, the deposit, the reserve and the twenty-dollar bill, is somebody’s promise, and promises can be issued in any quantity. It is why people still buy a metal that no bank, central bank or Bureau of Engraving and Printing can make more of on a Tuesday. For what the dollar is actually backed by, see what backs the dollar, and for the day the last link to gold was cut, the Nixon shock of 1971.

How is money created in the UK, Canada and Australia?

The same way. The Bank of England paper described the British system, and the mechanism works the same in Canada, Australia, New Zealand and the euro area. Commercial banks create deposits by lending. The central bank creates reserves and sets the interest rate. A companion Bank of England article that year put bank deposits at about 97% of the money held by the British public, with notes and coins making up the rest. Canada has had no reserve requirement since 1994; a bank there was already dividing by zero when the US was still teaching the multiplier.

The details differ: who regulates the banks, how the central bank pays interest on reserves, how much cash people still use. The whiteboard is the same everywhere. The only thing in that kitchen nobody can write into existence is the gold coin somebody hid in the freezer, behind the peas.

Sources

• How banks create money, and the “matching deposit” quotation: Michael McLeay, Amar Radia and Ryland Thomas, “Money creation in the modern economy”, Bank of England Quarterly Bulletin, 2014 Q1, published March 14, 2014. Bank deposits as about 97% of money held by the UK public: its companion article, “Money in the modern economy: an introduction”, same issue.
• US money supply (M2), monthly, seasonally adjusted: Board of Governors of the Federal Reserve System, via FRED (M2SL), read October 19, 2026. Currency in circulation, August 2026: FRED (MBCURRCIR).
• Reserve requirements cut to zero, effective March 26, 2020: Federal Reserve press release, March 15, 2020. Canada’s requirement reached zero in 1994: Bank of Canada.
• The Federal Reserve’s total assets: FRED (WALCL).
• Consumer prices up 9.1% in the year to June 2022: Bureau of Labor Statistics, July 13, 2022.
• Gold mined in 2025 (3,671.6 tonnes) and its share of the above-ground stock: World Gold Council, as cited in How Much Gold Is There in the World?

Derived on this page: cash as about a tenth of M2 ($2,475.6 billion of $23,342.8 billion, August 2026). Currency in circulation includes some cash held by banks, so the share of the public’s money is a little lower. Also derived: M2’s growth of 40.6% from February 2020 to March 2022 and about 51% to August 2026, and the Fed’s balance sheet growing about ten times from August 2007 to April 2022. Added October 25, 2026: about $7,200 of cash and about $23,000 of new M2 ($7.85 trillion, February 2020 to August 2026) per person, using the Census Bureau’s population clock figure of 342,916,055 on October 4, 2026.

Questions people actually ask

How is money created?

Most new money is created by commercial banks when they make loans: the loan and a matching deposit in the borrower’s account appear at the same time. The central bank creates reserves, which banks use to pay each other, and the government prints paper cash, which is about a tenth of the money Americans hold.

Do banks create money out of thin air?

In a sense, yes. When a bank makes a loan it does not lend out existing savings; it credits the borrower’s account with a new deposit, which is new money. It is limited by borrowers’ ability to repay, capital rules, interest rates and the need to settle payments with other banks.

Who prints money in the US?

The Bureau of Engraving and Printing prints paper money, and the US Mint makes coins. The Federal Reserve orders the notes and issues them to banks when customers withdraw cash, so printing swaps digital money for paper rather than adding to the total.

Does the Federal Reserve print money?

Not literally, but it creates money. The Fed creates reserves when it buys bonds or lends to banks, and when it buys from non-banks those purchases also create bank deposits. Its total assets went from about $0.87 trillion in August 2007 to $8.97 trillion in April 2022.

What percentage of money is physical cash?

About a tenth in the US. In August 2026 currency in circulation was $2,475.6 billion and the M2 money supply was $23,342.8 billion. The Bank of England put bank deposits at about 97% of the money held by the British public in 2014.

What happens to money when a loan is repaid?

It is destroyed. Repaying a loan removes money from the borrower’s account and cancels the loan on the bank’s books at the same time, so the amount of money in the economy falls.

What is the money multiplier?

An older textbook idea that banks lend out a multiple of their reserves, set by a required reserve ratio. Central banks now describe lending as coming first and deposits second, and the US reserve requirement has been zero since March 26, 2020.

How much has the US money supply grown since 2020?

The M2 money supply was $15,492.8 billion in February 2020, peaked at $21,788.1 billion in March 2022, and was $23,342.8 billion in August 2026, about 51% above its February 2020 level.