[first]This section covers all the nitty-gritty details of money creation by banks. We don’t assume any prior knowledge, but some bits might still be hard going if it’s your first time looking at this, so you may prefer our Banking 101 video course to start with.[/first]
The key to understanding what money is and how it is created is to forget everything you think you know about money and start again. The problem is that we have preconceived ideas of banks and money that come from our own viewpoint as customers of banks. As children we thought that money was just cash and were taught that a bank (or a piggy bank) is a place to put money to keep it safe. From inside a bank, it all looks quite different!
The vast majority of money is not cash, and
Banks are not places where you put your money to keep it safe.
In fact the ‘money’ in bank accounts is just an accounting entry, and banks manage the accounts, meaning that they have the ability to create and destroy money as they make loans and take loan repayments. (The principle is the same for central banks as well as private ones).
