What money really is

This is my understanding, for education. Not personal financial advice.

Most money isn't printed. It's typed into existence when someone takes out a loan.

You work for money. So it's worth knowing what it actually is.

Money is a promise everyone agrees on

A dollar bill costs a few cents to print. It buys a dollar of stuff because everyone, from your landlord to the IRS, agrees to accept it. The US dollar isn't backed by gold (that ended in 1971). It's backed by the US government's power to tax and by the size of the US economy. Economists call this fiat money: money by decree.

Money does three jobs. It's how you trade (medium of exchange), how prices are written (unit of account), and how you carry today's work into the future (store of value). It does the last job badly. Hold that thought for Chapter 3.

Most money is digital, and banks make it

Here's the part school skips. Physical cash is a small slice of the money supply. Most money is numbers in bank accounts.

Where do those numbers come from? Mostly from loans. When a bank approves a $300,000 mortgage, it doesn't take $300,000 out of someone else's savings. It types $300,000 into the seller's account and records your loan as an asset. New money now exists. The Bank of England said it plainly in 2014: "commercial banks create money, in the form of bank deposits, by making new loans" (Bank of England). When you pay the loan back, that money disappears again.

Why "fractional reserve" is the old story

The textbook story says banks keep 10% of deposits and lend out the other 90%. That's outdated. The Federal Reserve cut the reserve requirement to 0% in March 2020, and it's still 0% (Federal Reserve). Banks are limited by other things: - Profit and risk: will the borrower pay it back? - Capital rules: regulators require banks to hold a cushion of their own money against losses. - Interest rates: the Fed sets the price of money, which makes borrowing cheaper or more expensive (Chapter 2).

So the money supply grows when people and businesses borrow a lot, and shrinks when they pay down debt.

The government creates money too

When the government spends more than it collects in taxes, it borrows by selling Treasury bonds. During crises the Fed has bought trillions of those bonds with newly created reserves. In 2020 the broad money supply (M2) grew about 25% in one year, the fastest since World War II (FRED, M2). Prices followed in 2021–2022.

Who gets the new money first

New money doesn't land evenly. It reaches banks, big borrowers and asset markets first. They spend or invest it before prices adjust. By the time it reaches wages and savings accounts, prices have often already moved. Economists call this the Cantillon effect, after an 18th-century writer who noticed it.

That's my core point: if you only hold cash, you're on the wrong side of how money is made. People who own assets (businesses, property, stocks) tend to ride the new money. People who only save cash pay for it through higher prices.

What this means for you

• Keep enough cash for emergencies and bills. That's its job.
• Long-term money needs to be in things that grow: businesses you own.
• Learn who controls the money tap. That's next.

Common questions

Is my money safe in the bank? Deposits are insured by the FDIC up to $250,000 per depositor, per bank, per ownership category (FDIC).

Can banks create unlimited money? No. Each loan has to make sense for the bank and fit capital rules, and higher rates cut demand for loans.

Is fiat money a scam? I'd call it a system with winners and losers. It's not going away, so the smart move is to understand it and position yourself on the owner side.

Next: Lesson 02, Who runs it (the Fed, banks and government) →