Where does money come from? How does an economy keep getting more money – what is the origin?
In: Economics
Banks *generate* money via loans. Money is created out of thin air when banks do this. They can do this because they’re usually sending only some of the money they hold in their vaults out at a time. They may be liable for $1 million in loans, but at any given moment, their clients are only asking for $100,000 in payments. So as long as they have at least $100,000 in their reserves, they’re fine, they can stay in business. And more money is always coming in as people pay off their loan that the bank lent them, and people make deposits. This is called [*fractional-reserve banking*](https://en.wikipedia.org/wiki/Fractional-reserve_banking).
Lending is the *origin* of money. Money is a *representation* of debt. For the most part, in a modern economy, this is where all new money in the system comes from.
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