Making money

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James Clayton
Making money

It isn’t a secret that banks create money when they make loans. It was stated quite clearly by Graham Towers, the first Governor of the Bank of Canada and a former executive at the Royal Bank of Canada, when he testified before the Standing Committee on Banking and Commerce in 1939.[i]

The following excerpts are provided to drive the point home.


The process by which banks create money is so simple that the mind is repelled.

John Kenneth Galbraith, Money: Whence It Came, Where It Went, (New York: Houghton Mifflin Company, 1995), 18.


Commercial banks and other financial institutions provide most of the assets used as money through loans made to individuals and businesses. In that sense, financial institutions create, or can create money.

“Canada’s Money Supply” Backgrounder, (Ottawa: Bank of Canada, 2011).[ii]


Private commercial banks also create money—when they purchase newly issued government securities as primary dealers at auctions—by making digital accounting entries on their own balance sheets. The asset side is augmented to reflect the purchase of new securities, and the liability side is augmented to reflect a new deposit in the federal government's account with the bank.

However, it is important to note that money is also created within the private banking system every time the banks extend a new loan, such as a home mortgage or a business loan. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money. Most of the money in the economy is, in fact, created within the private banking system.

Penny Becklumb and Mathieu Frigon, “How the Bank of Canada Creates Money for the Federal Government: Operational and Legal Aspects,” (Ottawa: Parliamentary Information and Research Service, 2015), 2.[iii] [iv]


Money is created when banks make loans. Borrowers receive newly created demand deposits.

Robert Sexton, Peter Fortura, and Colin Kovacs, Exploring Macroeconomics, Canadian Fourth Edition, (Toronto: Nelson Education, 2016), 275. [v]


Few people realize that most of the money we use is actually created by the banking system, and not issued by the government or the Bank of Canada. […] An essential point to understand is that once a bank has you sign a loan agreement (your promise to pay) and gives you a loan (its promise to pay), the money supply increases at that moment.

John Dillon, Turning the Tide, Confronting the Money Traders, (Toronto and Ottawa: Ecumenical Coalition for Economic Justice and Canadian Centre for Policy Alternatives, 1997), 52-53.[vi]


Indeed, it’s important to keep in mind that any bank creates money whenever it issues a new loan—so there’s nothing particularly magical or unusual about the central bank doing this. Private banks don’t need depositors to issue new loans. They create money when they issue a loan and credit the borrower’s deposit account accordingly.

Jim Stanford, “Canada joins the QE club: What is quantitative easing and what comes next?,” (, April 8, 2020).[vii]


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

Mervyn King, Governor of the Bank of England from 2003 to 2013, speech given to the South Wales Chamber of Commerce, Cardiff (London: Bank of England, 23 October 2012), 3. [viii]


This article explains how the majority of money in the modern economy is created by commercial banks making loans.

Money creation in practice differs from some popular misconceptions—banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.[…]

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money 'multiplied up' into more loans and deposits.

Michael McLeay, Amar Radia and Ryland Thomas, “Money creation in the modern economy,” (London: Bank of England, 2014), Overview. [ix] [x]


In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations.

Zoltan Jakab and Michael Kumhof, “Banks are not intermediaries of loanable funds—facts, theory and evidence,” (London: Bank of England, 2019), Abstract. [xi]


The actual process of money creation takes place primarily in banks.

Anne Marie L. Gonczy, “Modern Money Mechanics. A Workbook on Bank Reserves and Deposit Expansion,” (Chicago: Federal Reserve Bank of Chicago, 1992), 3.[xii] [xiii]


Debt does more than simply transfer idle funds to where they can be put to use—merely reshuffling existing funds in the form of credit. It also provides a means of creating entirely new funds. [...]

But a depositor’s balance also rises when the depository institution extends credit—either by granting a loan to or buying securities from the depositor. In exchange for the note or security, the lending or investing institution credits the depositor’s account or gives a check that can be deposited at yet another depository institution. In this case, no one else loses a deposit. The total of currency and checkable deposits—the money supply—is increased. New money has been brought into existence by expansion of depository institution credit. Such newly created funds are in addition to funds that all financial institutions provide in their operations as intermediaries between savers and users of savings.

Anne Marie L. Gonczy and Timothy P. Schilling. “Two Faces of Debt,” (Chicago: Federal Reserve Bank of Chicago, 1992), 17 and 19. [xiv] [xv]


Bank lending occurs when banks create a deposit (money) through granting a loan.

Marco Gross and Christoph Siebenbrunner, “Money Creation in Fiat and Digital Currency Systems,” (Washington, D.C.: International Monetary Fund, 2019), 10. [xvi]


If we have not made it clear before, let us explicitly state that banks have two fundamental roles. They are at once “depositories” and also “banks of issue”—that is, they accept deposits of existing money, and they also create new money by making loans.

Thomas H. Greco, Jr., The End of Money and the Future of Civilization, (Vermont: Chelsea Green Publishing, 2009), 103.[xvii]


The fact is that present day banking is mainly a credit clearing process in which additions and subtractions are made to bank customers’ account balances. However, banks perpetuate the myth that money is a “thing” to be lent. If a client’s balance is allowed to be negative, the bank considers that to be a “loan” and will charge “interest” on it. Has the bank loaned anything? Not really. What they have done is to allocate some of our collective credit to the “borrower.” For this they claim the right to charge interest.

Thomas Greco, “Credit Clearing—Pure and Simple,” (, revised July 22, 2016).[xviii]


When banks make loans, they create money. This is because money is really just an IOU. […] There's really no limit on how much banks could create, provided they can find someone willing to borrow it. […]

What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow.

[…] Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.

David Graeber, “The truth is out: money is just an IOU, and the banks are rolling in it. The Bank of England's dose of honesty throws the theoretical basis for austerity out the window,” (London: The Guardian, March 18, 2014).[xix]



For more information please read “Taking Control of our Collective Credit”[xx] and “Credit and Labour.”[xxi]







[v] Robert Sexton, Peter Fortura, Colin Kovacs, Exploring Macroeconomics, Canadian Fourth Edition, (Toronto: Nelson Education, 2016), 269, 271, 274 and 275.











[xvi] file:///C:/Users/User/Downloads/wpiea2019285-print-pdf.pdf