How Money Is Created
Here’s the part of the book I know you’ve been waiting for: how money is created. It’s a beautiful thing to see. Unfortunately, banks are the only outfits legally allowed to create money, and they do it under the auspices of the Federal Reserve.
By money, I mean deposits, not currency. Most money—most of M-1—exists in the form of deposits. When banks have reserves above the amount required by the Fed—excess reserves—they are allowed to create new deposits. These new deposits are created in the form of loans. So actually the term money creation in our economy means expansion of credit and debt.
No single bank can create money. Some people believe that one bank can take in new deposits and somehow lend out a multiple of ...