Crash Course Chapter 7: Money Creation

Here we will explore the process by which money is created. In order to appreciate the implications of our massive levels of debt, you have to understand how the debt came into being.

John Kenneth Galbraith once famously said, “The process by which money is created is so simple that the mind is repelled.” We’re about to discuss that very thing. Money creation is a bizarre thing to ponder. It is actually a very simple process, but it’s really difficult to accept.

Money is loaned into existence. Conversely, when loans are paid back, money ‘disappears.’

There is a federal rule that allows banks to loan out a proportion, a fraction, of the money they have on deposit to others. In theory, banks are allowed to loan out up to 90% of what people have on deposit with them. Because banks retain only a fraction of their deposits in reserve, the term for this process is “fractional reserve banking.”