A misconception:

banks can create money at will.

20th Nov 2025

You approach a bank for a mortgage. They agree. They create money to pay the vendor of the house. New money is created. There is some truth in this, but it gives the impression that a bank can simply create money at will. If they could they would do so to pay some staff members and pay the CEOs handsomely. If they could create money at will, they would, and they would not need to lend or accrue savers. They would create as much as they needed ad infinitum.

Were you to dig a hole in your garden to source gold, upon extracting it from the ground an asset is created. That asset can be swapped for money. Whilst new money can be created in lieu of that gold, once the gold is put onto the market, the value of all the gold in the world drops a tiny amount to compensate for the increase in the amount of gold available. The value of all the gold in the world stays the same, each gram is worth a little less.

Assets are created enabling banks to put them on their balance sheet. New printed money on the one side, new asset on the other. However, more assets available on the market can reduce the value of them all. Printing money does not affect the total value of all the currency in circulation, it lowers the value of each unit of currency.

Lucy has some land passed down to her through the generations. She is building a house on the land. She has permission to build. She is making her own bricks. She will use her own materials for the majority of the build.

When the house is complete, she sells it. A buyer borrows the money from a bank to give to Lucy. The bank ‘creates’ the money to pay Lucy.

We focus on the money created by the bank. However, the true money creation is when each brick is made. More is made when the bricks are laid forming the walls of the house. At each stage towards the completion of the house, more money is created.

Most houses are not built this way. Most rely on paying lots of people for the materials and maybe the land to build on. An uplift in land value can be money accretive - turning a field for farming into a field for houses. The money the bank credited the account to pay lucy does little more than return the money circulated during the purchase of material and labour.

Wealth is created when something takes on more value. Clay to brick. The clay becomes more valuable when in brick form. Cash can be created to offset that rise in value.

To put it into perspective, when a bank effectively creates money to lend to the buyer of a newly built house, the amount of newly created money is roughly equivalent to the profit the builder has made. If the house is sold for 1000, it is not 1000 of new money created but perhaps 150 relating to the profit. The other 850 gets deducted from credits to other customers at the bank or credits at other banks.

Banks must balance their books. Each loan made needs a corresponding asset to back it up. Any doubt about the quality of the assets a bank has on its ledger leads to a loss of credibility. Other banks will not lend to it as we saw during the 2008 financial crisis when no one knew what the true value of housing assets were.

Banks are not at the centre of money creation. Economic value added is. Economic value added minus economic value destroyed gives you the total amount of money created. (If I grow an apple, sell it, then someone eats it, the money is created then destroyed and flushed down the toilet a day or so later.)