How banks newly create 100% of the money they lend, every time they lend
The accounting and limits of bank money creation
This is part of a series of presentations that share insights from my four years of research into the design of national currencies. The series curates and encapsulates learnings that I think are particularly interesting, important, and useful for understanding how our world works, today.
This second video gives a brief overview of the way banks newly create 100% of the money they lend, every time they lend. This runs contrary to the typical belief that banks lend out depositors’ savings. As discussed in a prior video on the history of money creation, this way of creating money through banking is the primary source of money in the world today.
This video covers the accounting and limits placed on bank money creation. The next video will cover the law and politics governing this system of money creation. As always, the presentation builds on a large body of scholarship, which can be found in the references listed below.
References
These are organized in the order of their approachability and the sequence of information in the video’s narrative.
McLeay, Michael, Amar Radia, and Ryland Thomas. 2014. “Money Creation in the Modern Economy.” Bank of England Quarterly Bulletin 54 (1): 14–27. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy.
The Bank of England’s seminal 2014 bulletin describes in clear language that banks do not lend out depositors’s savings because they newly create 100% of the money they lend via accounting.
European Central Bank. 2015. “What Is Money?” Updated June 19, 2024. Accessed 2024. https://www.ecb.europa.eu/ecb/educational/explainers/tell-me-more/html/what_is_money.en.html.
This concise introduction provided by the European Central Bank states that “If a commercial bank grants you a loan to buy a car, they create money in this way… and when you repay the loan, the money created disappears.”
Ryan-Collins, Josh, Tony Greenham, Richard Werner, and Andrew Jackson. 2012. Where Does Money Come From? London: New Economics Foundation. https://neweconomics.org/2012/12/where-does-money-come-from/.
This book provides an excellent and accessible, yet scholarly, introduction to money creation in today’s banking-based national money systems. It is an especially useful resource because it presents the exact accounting entries used in banking to create money. It also provides the accounting entries for many other transactions, such as when banks buy cash (bills and coins) from central banks in order to provide customers with a physical representation of their electronic deposits. While the book focuses on the United Kingdom, it is relevant for readers in all countries because the UK system is the original bank money creation system upon which all others are built today.
Federal Reserve Money Types: Government (M1) vs Bank Money (M2)
Board of Governors of the Federal Reserve System (US). 2025. “M1 (M1SL).” Federal Reserve Bank of St. Louis (FRED). Accessed October 2025. https://fred.stlouisfed.org/series/M1SL.
Board of Governors of the Federal Reserve System (US). 2025. “M2 (M2SL).” Federal Reserve Bank of St. Louis (FRED). Accessed October 2025. https://fred.stlouisfed.org/series/M2SL.
United States Mint. 2024. “How Coins Are Made: Bringing Coins Into Circulation.” Inside the Mint. July 2, 2024. https://www.usmint.gov/news/inside-the-mint/how-coins-are-made-bringing-coins-into-circulation
This article on the website of the United States Mint explains that coins are minted by the Mint in response to orders for coins placed by depository institutions (banks). Coins do not enter circulation as spending by the government.
Federal Reserve Bank of San Francisco. 2025. “Infographic on the Cash Lifecycle.” Last modified 2025. https://www.frbsf.org/cash-lifecycle-infographic/
This article and infographic shows how coins from the Mint and bills from the US Bureau of Engraving and Printing are put into circulation by the Federal Reserve in response to orders from banks, not as spending by the government.
Glocalities. 2014. “What Global Population Thinks About Commercial Banks.” Press release. Accessed October 2025. https://glocalities.com/news/press-release-global-population-does-not-want-commercial-banks-to-stay-responsible-for-creating-most-of-the-money.
This survey of 24,000 people conducted in 12 languages across 24 countries revealed that a majority of people believe the majority of money is created by governments or central banks. Only 14% preferred that private commercial banks be the primarily creators of the money supply.
Positive Money. 2014. “POLL RESULTS: Only 1 out of 10 MPs Understand That Banks Create Money.” Positive Money (blog). August 19, 2014. https://positivemoney.org/2014/08/7-10-mps-dont-know-creates-money-uk/.
This poll found that seven out of ten members of the UK parliament beleived that *only* the government had the legal power to create money, including digital bank money. Only 10% knew banks creates over 95% of the money in ciruclation.
Werner, Richard A. 2016. “A Lost Century in Economics: Three Theories of Banking and the Conclusive Evidence.” International Review of Financial Analysis 46: 361–79. https://doi.org/10.1016/j.irfa.2015.08.014.
This paper describes an empirical test of bank accounting software conducted in 2014. The investigator found that the software confirms that 100% of the deposits provided to borrowers are newly created.
Positive Money. 2013. “Positive Money Banking 101.” YouTube playlist. Accessed October 2025. https://www.youtube.com/playlist?list=PLxl7ssO5_r5fG9OEFsMYXUDr6hYXwRMx8.
This brief and animated video series provides an excellent introduction to bank money creation.
Perry Mehrling. 2020–. “Economics of Money and Banking (Mehrling) — Full Course.” Institute for New Economic Thinking. YouTube playlist. Accessed October 2025. https://www.youtube.com/playlist?list=PLbjqQEPFY1J8ShzMPiaULMDCIuFmaBs0Y.
This course taught through Columbia University by highly regarded banking historian and economist Perry Mehrling, provides instruction on bank and central bank accounting.
Money Justice Collaborative. New Banking Consensus Database. Accessed October 2025. https://moneyjustice.org/consensus.
This database contains quotes and citations for statements published by experts confirming that banks create 100% of the money they lend. The more than 150 quotes come from central banks, banks, banking scholars, economists, and multilateral organizations.
Hockett, Robert C., and Saule T. Omarova. 2017. “The Finance Franchise.” Cornell Law Review 102 (5): 1143–1218. https://dx.doi.org/10.2139/ssrn.2820176
This paper illuminates bank money creation through the lens of law, including some of the limits on bank money creation.
Ricks, Morgan. 2016. The Money Problem: Rethinking Financial Regulation. Chicago: University of Chicago Press. https://press.uchicago.edu/ucp/books/book/chicago/M/bo22438821.html.
This book illuminates bank money creation through the lens of law, including some of the limits on bank money creation.
Thanks for the question, Brian. It's helpful to know that my explanation wasn't satisfactory. I thought I had done so in comparing the story of banks taking in deposits and setting them aside vs banks creating money purely as credit creation. The fractional reserve story says that banks lend out of deposits by setting aside a portion and lending out the rest. That is not how it works, and therefore the fractional reserve story is not an accurate description of how banks create money.
I'm guessing what I needed to further do is address the common confusion that comes into play with the capital adequacy rule. The capital adequacy rule says that a bank cannot hold assets (loans and bonds, primarily) greater than a percentage of their "capital" (the ratio is roughly between 8-13%, so is often shorthanded as 10%, but that's not correct). Capital is not deposits. It is the "net wealth" of the bank. It is a residual of the difference between a bank's assets and its liabilities. For big banks, it is best understood as a measure of the profits the bank has retained rather than paid out to its shareholders. The capital adequacy rules imposts no limits on bank lending in relation to deposits, at all.
In countries that still have reserve requirements (mainly in the Global South), the reserve requirement does not work the way that the fractional reserve story says, either. The reserve requirement says that a bank must hold central bank reserves equal to 10% of deposits. It doesn't say a bank must hold back 10% of its deposits from being lent out while it lends out the rest. So, banks can (and do) lend by creating fresh deposits and then look for reserves later, often by buying or borrowing them from the central bank or other banks. They don't use deposits to do that buying and borrowing, either. Deposits already on a bank's books are useless for getting central bank reserves. That is because deposits are a debt of the bank, not an asset. The central bank and other banks don't want to sell reserves to a bank in exchange for their debts! They want to get assets in exchange. So, banks buy/borrow reserves by trading away the loans and bonds (assets) on their books, not deposits.
Importantly, the reserve requirement never actually limited the banking sector's ability to lend, as a whole. The central bank always provides enough reserves to meet banks' need to settle transactions with each other. However, it can increase the cost banks incur when holding loans above a 10% ratio to deposits, since they will have to rent reserves from the central bank to stay in compliance with the reserve requirement. This can deter individual banks from making loans, but as I said, it doesn't limit the ability of the banking sector, as a whole, to grow lending.
Thanks for the question, Brian. Let me know if that helped!
Nice video! You say that the fractional reserve banking story isn't accurate, but don't really explain the reason. Can a bank with $10,000 in deposits make $10,000,000 in loans? Why or why not?