Chapter 01 · How money really works

Who really creates your money?

6 min

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More than 90% of your money has never taken the shape of a banknote. It was never printed. It was never minted. It exists as a line on an account. Created by your bank. To lend you a sum that nobody held before.

So, do you actually know where money comes from?

If your answer is "the central bank's printing press", then you just walked right into it. Like 95% of people, finance graduates included. No one ever explained it to you properly.

Read the next part carefully, you're in for a surprise.

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Where does money come from?

More than 90%⁠(opens in a new tab) of our money is neither printed by the state nor created by central banks. It's conjured up as if by magic by commercial banks (think JPMorgan, HSBC, ...) every single time they lend money.

The moment they grant a loan, with one simple accounting entry, they create money out of thin air.

"Out of thin air, really?", the skeptics will fire back. That's true, but not quite. Out of a promise: the borrower's promise to pay it back. That's all a bank needs to manufacture money.

These banks hold an almost magical power. Almost: this power is neither unlimited nor free. It takes a creditworthy borrower, rules to follow, a way to refinance. Those constraints are real, but looser than people think. In practice, when a bank wants to lend, it lends - and creates the money along the way.

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Want to see it with your own eyes? Perfect. Let's get our hands dirty. You're a banker now. Congratulations (or not)!

Nicolas wants to buy a house

Nicolas has a great plan: to own the home he lives in. To pull it off, he's going to ask his bank for a €200,000 loan.

And this is where you step in: you're his banker and you hold the power to make his dream happen by granting that loan.

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But before you take the controls, let's run through a quick accounting vocabulary refresher.

Accounting: a few key definitions

Your savings, your phone, that money you lent your brother-in-law and still haven't seen again? All assets!

That money can only come from one of two sources:

From others: you owe them, that's debt.
From yourself: that's your equity.

Yes, your own money shows up under liabilities. Not because you owe it to anyone, but because liabilities answer one single question: "who paid for this?" And here, the answer is you.

Lent money out? Until you're not paid back, you hold a claim - a promise to be paid, and therefore an asset on your balance sheet.

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Got it? Perfect. Take a look at Nicolas's bank balance sheet: it has already lent €1,000,000 to its customers.

Now, grant the loan to your customer.

NICOLAS'S BANK BALANCE SHEET

ASSETS	LIABILITIES
€480,000,000 (all claims on customers)	€480,000,000 (all matching deposits in customers' accounts)

A small pedagogical shortcut: I've left out the bank's own capital, its reserves, its interbank debt. A real bank has all of that too. We'll get to it in . For now, we're zooming in on one thing only: the magic line.

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But one piece of the puzzle is still missing: what the bank has to hold in reserve against that credit. .