Banks create money when they make loans. Say you want to buy a house. You have saved $50,000, but the house you want is $250,000. A bank feels optimistic about your job, and the broader economy, so it makes a $200,000 loan for you. You buy the house. Blamo! $200,000 was just created by that bank that did not exist before you signed.
That $200,000 has very little to do with deposits in the bank… not quite NOTHING to do with it, but that’s a story for another day and a different ELI5.
Latest Answers