Who creates money?

Money creation starts much the way you would expect. A government agency like a central bank or a treasury puts in an order for more money to be printed. Then, in a factory or mint somewhere, someone’s face is stamped on a bill or coin, turning previously useless paper or metal into valuable currency. This money is then shipped to private commercial banks, who give it to the the rest of us when we make a withdrawal from our bank or ATM.

But that’s only a small part of the story. Roughly 3 percent of the story to be exact.¹

Banks hold your cash for you, in the form of deposits. But banks don’t just look after money. They also give it out, in the form of loans (including mortgages). And these loans are how most new money is made. Confused? Let’s break it down. 

Imagine you want to borrow £10,000 from your bank. You wouldn’t just go into your local branch and leave with a big briefcase filled with cash (cool as that would be). Instead, your bank will give you an electronic deposit, which means the next time you checked your bank account the number on the screen would be £10,000 higher than it was before you took out the loan. 

This money is ‘real’ in the sense that you could walk into any shop and spend it, or withdraw it all from an ATM. But it’s not ‘real’ in the sense that after they approved your loan application someone from the bank ran into some vault somewhere to grab ten grand worth of paper money and relabel it with your name. In other words, almost all the money that exists in our financial system is created when some numbers are programmed into a computer. 

You may be wondering how this can be possible considering you could walk into your bank now, demand the entire contents of your account in paper money, and they’d have to give it to you. The answer is because most people will never do this. As long as almost all of us only keep a tiny percentage of our money in cash form, banks can meet all their customers’ withdrawal demands by keeping just a small* pile of notes and coins in-house. Whenever someone wants ‘their’ money in cash form, the bank simply takes the requested amount of money out of this central pile and change the electronic number on the withdrawer’s bank account. 

But what if one day everyone did wake up and decide they wanted to withdraw all their money? That’d be what we call a bank run and it’d be messy. Banks wouldn’t be able to give everyone their money, and unless the government stepped in the bank would almost certainly collapse and people would lose their money. (If you think that story sounds familiar, it’s because it’s what happened during the 2008 financial crisis.) 

So, who creates money? Banks, computers, and borrowers, mostly. The government is also involved, both in the printing of paper money and in regulating the whole system. Is this a good way to create money? As you might expect, that’s a pretty controversial question.

*Small relative to how much money they look after, we’re still talking about millions of pounds.