How Banks Create "Money" Out of Thin Air

Deception and miseducation keep people enslaved

The Federal Reserve - Washington, D.C.

Dan SmithRdsmith4, CC BY-SA 2.5 <https://creativecommons.org/licenses/by-sa/2.5>, via Wikimedia Commons

People often talk about the importance of education, and to some extent, I agree—particularly when it comes to reading, writing, and arithmetic. Beyond that, though, very little of what they teach in school is applicable and relevant to life in the real world. Sure, certain professions require specialized training and education, but I'm referring to basic schooling—kindergarten through high school.

One thing we're definitely not taught is how "money" really works, and yet we're told we need it. We strive for more of it. Far too many of us will compromise ourselves and our integrity to get it. We aspire to become wealthy. And yet very few people grasp how it's created and functions.

Ignorance regarding even the basics of "money" keeps us all enslaved. I use the word "money" loosely, as none of it is what we're told it is. What we call money today is best described in legalese as "colorable."

The 5th edition of the Black’s Law Dictionary defines colorable as:

“That which is in appearance only, and not what it purports to be; hence counterfeit, feigned, having the appearance of truth.”

In the somewhat distant past (depending on which country we're talking about), we could take our paper currency to a bank and redeem them for the equivalent value of gold (or silver). Such currencies were known as "convertible." This is because they had legitimate value, and extra paper currency could only be printed if the country acquired more gold or silver.

Today, our currency is worth nothing more than the paper it's printed on—and worse yet, it's mostly gone digital. Our currency is only exchangeable for goods in the amount printed on these pieces of paper because of our collective agreement to pretend they are worth what they claim to be worth. Our lives revolve around our belief in this fiction, much like how children believe in Santa and the Easter Bunny.

While "money" is not the appropriate word for what we have today, I will use it throughout this article since it's what everyone understands (stands under).

In another article, we'll get into how sound money worked and the history of how central banks hijacked the world's money supply. But today, we're just going to look at the fraudulent financial system and how it creates "money" out of nothing.

What Is a Central Bank?

Investopedia has the best definition out there:

“A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks.”

Note the word “privileged.” It’s beyond appropriate. Because privileged they are. And you’ll see why as we look at how money is created.

Most people think these central banks are owned and run by their governments. They are not. For example, the Federal Reserve Bank is a privately owned corporation (3rd paragraph of this Britannica entry) established in 1913.

Let that sink in for a minute: unnamed, private citizens (not necessarily Americans) own and control the United States’ money supply. Moreover, those same people own and control nearly every central bank globally.

Central banks weren’t always the way. Governments used to print, mint, and control their own sovereign money supply through their treasuries and national banks. Eventually, most countries’ finances got hijacked by the same people who hijacked that of the United States.

This is the only basic history you need to understand how money is created today. I’ll use the US as an example, but know that things operate similarly in your country.

The economist, Harvard professor, two-time Presidential Medal of Freedom recipient, and member of four US government administrations, John Kenneth Galbraith once said:

“The process by which money is created is so simple the mind is repelled.”

By this he means that the truth about money creation causes such cognitive dissonance that you’ll struggle to believe it.

And the late Henry Ford said in the April 19, 1938 edition of Social Justice:

“It is perhaps well enough that the people of the nation do not know or understand our banking and monetary system, for if they did I believe there would be a revolution before tomorrow morning.”

(Note: Much of what I present below is done so in a simplified, digestible manner, so that you do not need a financial background to make sense of it.)

A Debt-Based Monetary System

In the US, money is created three ways:

1. Retail and commercial banks type it into existence

2. Congress legislates it into existence

3. The Federal Reserve (the Fed) creates as much of it as it wants, whenever it wants (a more advanced topic that we’ll touch on lightly)

Irrespective of this three-tiered approach, the essential underlying truth is this:

Money is lent into existence.

All money is debt.

Therefore, no money can exist without debt.

And this is precisely what we’ll explore in this article.

A Day at Your Local Bank circa 2023

Let’s say you go to your local bank, and you apply for a $10,000 loan, and they approve it. Yay!, you think. (Ok, maybe you’re not so corny, but the sense of relief and modest celebration is there.) So, where does the money being lent come from?

Contrary to popular belief, the bank is not loaning you money from its coffers. Even fractional reserve banking essentially came to an end in the US in 2020. (More on this to come in a separate article on sound money vs. fiat debt-based monetary systems. Thanks to

H Myers

for the link.) In fact, it’s not legally (nor lawfully) a loan if they aren’t lending you something of their own that is of value (or money they take in from depositors).

Once the loan is approved, the bank literally types numbers—the $10,000 you’re “borrowing”— into your account or types it into their system and cuts you a check for said amount. Under almost no circumstances is the bank lending you its own money.

And they can do this because the federal government sanctions it. Now, if you figured out a way to hack into your bank account and type in the same digits as the bank does re: loans—not taking ‘digits’ from anyone else’s accounts—you would land yourself in federal prison for counterfeiting and fraud, among other things.

Forever Indebted

So, how does this tie into the notion that money is lent into existence? That money in our current system can’t exist without debt?

Well, they charge you interest, of course. (This form of lending is called usury.)

Now, think about it: you have to go out and work, in the form of economic activity, to repay the “loan” the bank made you, but you also have to pay them interest on that invented money.

The problem is that when they invent the money for the loan, they do not also invent the amount of interest you will eventually pay them over the life of the loan.

As a result, this means that all of the personal debt in the world can never be paid off. There simply isn’t “enough” money in existence to do so.

Let’s examine a simplified/distilled example to make this clearer. (Do not get hung up on the mathematical aspect of this example.) :

Imagine that on January 1st, 15,000 people each took out a loan for $5,000 for a term of 5 years at 10% APR. If all made their loan payments by their due date each month, by December 31st, 5 years into the future, these 15,000 people will have had to pay back the following:

Principal Loan Total: $75,000,000

Interest Total: $20,611,650 ($1,374.11 per person)

(You can use this Loan Calculator to figure out such things, but the actual numbers do not matter.)

So, if the bank only typed $75 million of money into existence, how do these people pay back the collective interest of $20+ million?

They must work to earn beyond their individual $5,000 loans to take in an extra $1,374.11 from the existing supply to pay it off. But since the banks did not also create the extra $1,374.11 in extra money for each of these loans, the money supply is technically short the $20,611,650.

On an even simpler level: no matter how much money there is, there will always be more debt because debt = principal loan amount (created money) + interest.

Put in another way: If this were a game of musical chairs, and everyone attempted to pay off their debt while the music was playing, there’d still be people left standing when the music stopped because there isn’t enough money in circulation to cover the principal loan total and all the interest for every loan in the world. (At least that’s in circulation for us plebes to use, but that’s an entirely different article.)

It doesn’t matter which example you come up with and which numbers you use. If usury is still at work, the result is always the same:

Debt persists.

Legislating Money Into Existence

The next level of money creates starts with Congress. The US House of Representatives and the US Senate pass spending bills. Once upon a time, such bills were in the millions. Now, they are in the trillions.

After such a bill has passed, the US Government “sells” bonds to the Federal Reserve for the amount needed. The Fed then prints/digitizes that amount of money specified in the bill into existence and “gives” it to the US government.

But now, the American public is indebted for that amount (of the bonds “sold”), plus interest (on those bonds) to the Fed. If you want to be precise, the American public is indebted to the private individuals who own the Fed.

So, yes, you understood that right: a supposedly sovereign nation is indebted to a privately-owned corporation for the “privilege” and “service” of having its money printed by said foreign entity. (AS noted above, the US used to do this on its own just fine.)

Since we have usury again here—loans (bonds) + interest—the result is the same: the country cannot get out from under its debt. Ever.

And this will remain the case unless people reclaim their governments, initiate monetary revolutions, and boot these fiat currency-based central banks out of their countries. They would then be able to regain control of their finances, issue a new sovereign currency, and eliminate usury.

The Fed Creates Unknown Sums of Money

This a completely separate can of worms that I’m only going to open a crack since the Fed has capacities that most of the other central banks don’t. That is largely because of its complex role in the global financial system.

Let’s start by saying there has never been a public audit of the Fed in its 110-year history, so its balance sheet is unknowable to us. After all, the Fed creates money on a whim and answers to no one but its owners (who have a Board of Governors to run the show).

Here’s a perfect example of how the Fed creates money out of thin air that is pertinent to the current banking woes:

Say Bank A is short on liquidity and can’t meet its “calls” — usually payouts on short-term “products”—operational costs, and more. Bank A will then sell some of its assets (securities) on the overnight Repo Market (Repurchase Agreements Market) to another bank (Bank B) with the agreement to buy said securities back to Bank B within a set time frame (usually 1-14 days) at a higher price. The cash made from that “sale” allows Bank A to meet its obligations. Repos are like duct tape trying to hold together a rusting, dilapidated car (i.e., the financial system). 

However, say Bank A is in such dire straits and is nowhere close to being able to meet its financial obligations. In such an instance, other banks won’t want to “lend” to Bank A on the Repo Market out of fear of not being paid back. In this case, Bank A is forced to go to “the lender of last resort,” the Fed, for a short-term loan to stay liquid.

The Fed will type money into existence and loan it to Bank A at the “discount rate.” The name is somewhat misleading, but the discount rate is actually an interest rate higher than the one banks pay each other for “purchases” (the Fed Funds Rate) on the Repo Market.

So, not only did the Fed create money out of thin air, it burdened the currency and financial system with more debt and will demand interest in return.

This is only one major example of the numerous mechanisms through which the Fed invents money and intensifies this debt-based hell.

The End of the System

We can’t all get out from under debt unless we end the system that creates it and relies on it. Unfortunately, in the current system, some must remain in debt. The good news is that as we watch the death of the only financial system we’ve known, the debt will eventually go with it.

The system was created to extract time, energy, and wealth from us, so it's easy to see why they don’t teach this in school. Getting people to behave like compliant cogs in the wheel would be far too difficult if they did.

The system funnels wealth upwards, like a giant Ponzi scheme.

And with this (somewhat) simple explanation, you can see why Henry Ford said there would be an overnight revolution if the masses were to learn how the financial system works.

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Catch up on related articles you missed:

As the Banks Fall (Part 4): Deutsche Bank, The Jim Cramer Effect & Bank Consolidations

As the Banks Fall (Part 3) and Digital Authoritarianism

As the Banks Fall (Part 2): Bankruptcies and Consolidations

As the Banks Fall (Part 1): The Beginning of the End of the Modern Slave System

How to Thrive in Uncertain Times

The US Will Lose Its World Reserve Currency

Central Bank Digital Currencies: The Wet Dream of Aspiring Totalitarians