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.

If you dug a hole in your garden to source gold. You dig it out of the ground and create money. Except you do not. You find the gold, refine it so that it is saleable. The gold is put onto the market. The value of all the gold in the world drops a tiny amount to compensate for you making more available to buy and sell. The value of all the gold in the world stays the same, each gram is worth a little less.

Imagine 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.

The bank has to 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.)