Credit

How do banks create money? (Yes, out of nothing.)

On 7 August 2013, in a small town in Bavaria, a professor borrowed €200,000 from a tiny local bank. He had one condition. He wanted to watch the money arrive, and film exactly where it came from. It came from nowhere. It had not existed until the moment he signed.

The short answer

Banks do not lend out money that savers put in. When a bank agrees a loan, it types the amount into your account. That typing is the moment the money is made. Nothing is moved from anywhere else. The Bank of England says this itself.

What most people think happens

Picture a bank. Savers carry money in. The bank keeps it safe in a vault. When you ask to borrow, the bank hands you some of the savers' money and charges you for the favour.

It is a tidy picture. Nearly everyone has it. It is also wrong, and it is not a small kind of wrong.

What actually happens

When a bank agrees to lend you £10,000, nobody goes to a vault. Nobody's savings go down. A member of staff enters two numbers into a computer.

The first number goes in your account: £10,000, yours to spend. The second number is written next to your name in the bank's own records: £10,000, owed back, plus interest.

Both numbers are typed at the same moment. Before that moment, neither existed.

That new £10,000 in your account is money. You can spend it in a shop. The shop can pay staff with it. It works exactly like the money that came from your job. Because it is the same stuff.

Two numbers, one moment. The money and the debt are born together.

How do we know? Someone filmed it

For a hundred years economists argued about this and never tested it. In 2013 Professor Richard Werner, then at the University of Southampton, decided to just go and look.

He asked big banks to let him borrow money while they showed him their internal accounts. They said no. Two medium sized German banks said no. Finally a tiny co-operative bank in Lower Bavaria said yes: Raiffeisenbank Wildenberg, eight members of staff.

On 7 August 2013 he borrowed €200,000 there. One member of staff, the head of the credit department, processed everything. Cameras recorded it. A BBC reporter watched. The whole thing took about 35 minutes.

Then came the important part. Werner checked whether the bank had moved that €200,000 from anywhere. Had it checked its reserves first? Had it taken money from other customers? Had it borrowed from another bank?

No, no and no. Nobody made a call. Nobody moved a thing. The bank's director later put it in writing: they did not check whether they held enough funds, and they made no transfers to pay for it.

The money appeared because the bank typed it. Werner's paper, published in a peer reviewed journal, put it plainly: the bank "newly 'invented' the funds".

A fair question

One small bank in Bavaria. Does that prove anything about your bank in Britain?

On its own, no. That is why the next bit matters more than the experiment.

The Bank of England says the same thing

You do not have to trust an economist with a camera. In 2014 the Bank of England published this in its own quarterly bulletin, written by three of its own staff.

Banks, they wrote, "do not act simply as intermediaries, lending out deposits that savers place with them". They added that banks do not "multiply up" central bank money either. Instead: "the majority of money in the modern economy is created by commercial banks making loans".

That is the central bank of the United Kingdom, in a document anyone can download, saying the tidy vault picture is wrong.

So how much of our money is made this way?

Almost all of it. You can check this yourself with two numbers the Bank of England publishes.

96.8% of money in the UK exists only as numbers in bank accounts.
Notes and coins are the other 3.2%.

Here is the working. The Bank of England's measure of UK money, called M4, stood at about £3,309 billion in June 2026. Notes and coins in circulation came to about £106 billion in the same month. Divide one by the other and cash is 3.2% of the money in this country.

The rest, roughly £3,203 billion of it, is bank deposits. Numbers in accounts. Most of it made by banks agreeing to loans.

Which means when people say "the government prints money", they have the wrong villain and the wrong verb. Most new money is not printed. It is typed, by private companies, when they decide to lend.

The catch nobody mentions

Here is the part that changes how you see everything else on this site.

If almost all money is created when somebody borrows, then almost all money starts life as somebody's debt. Money and debt enter the world holding hands.

That leads somewhere uncomfortable. For the amount of money in the country to grow, somebody has to borrow more. When people stop borrowing and start paying loans off, money is destroyed as the debt is cancelled, and the amount of money shrinks.

There is a second thing worth noticing. The bank creates the £10,000 it lends you. It does not create the interest you have to pay on top. That has to come from money somewhere else in the economy.

People argue hard about what that means. Some say it makes the whole system a treadmill that needs ever more borrowing. Others say it is fine, because banks spend their interest income back into the economy, where you can earn it again. Both sides are worth hearing. We will give that argument its own page.

Worth sitting with

Somebody decides where all this new money goes. Not you, and not a government minister. Thousands of separate lending decisions, made by private companies, deciding who gets newly created money and what for.

Lend it to a business building something, and the country gets a new factory. Lend it to people bidding against each other for houses that already exist, and the country gets higher house prices instead.

Same power. Very different results. That is why "where does new money go?" is one of the biggest questions in this whole subject.

What this means for you

Take these four things away

Borrowing is not borrowing. Nobody lends you their savings. The bank creates new money and you owe it back. You are paying for the typing, not for the use of someone else's cash.
That is why interest rates matter so much to you. The price of borrowing is set on money that costs almost nothing to make. Which is exactly why the number they charge you, the APR, deserves your full attention.
Money is not a fixed pile. There is no set amount that everybody shares out. The amount grows and shrinks with how much people are borrowing.
It is not a secret and it is not a scandal. It is written down by the Bank of England and printed in academic journals. It is simply not taught. Now you know it, and you know where to point when someone tells you otherwise.

None of this means banks are villains, or that you should be frightened of them. You will almost certainly use one all your life. It means you should understand what actually happens when you sign, because the person on the other side of the desk certainly does.

Check it yourself

Do not take our word for anything. Every claim on this page comes from one of these. All are free to read.

The Bank of England, in its own words. Money creation in the modern economy, Quarterly Bulletin 2014 Q1, by Michael McLeay, Amar Radia and Ryland Thomas of the Bank's Monetary Analysis Directorate.
The experiment. Richard A. Werner, Can banks individually create money out of nothing? The theories and the empirical evidence, International Review of Financial Analysis, volume 36, 2014, pages 1 to 19. The Bavarian bank, the €200,000 and the director's letter of confirmation are all in there.
Werner explaining it himself, in about six minutes: How banking works (money creation).
The deposit protection limit. FSCS: what is protected in a bank or building society. It went from £85,000 to £120,000 on 1 December 2025.
The 96.8% figure. Our own sum, from Bank of England data for the same month: M4 money supply about £3,309bn against notes and coin about £106bn, both June 2026. M4 is in the Bank's monthly Money and Credit release; notes and coin is in Bankstats table A1.1.1. Checked 27 August 2026. Do the division yourself.

Questions people ask

Do banks really create money out of thin air?

Yes, in the sense that matters. When a bank agrees a loan it does not move money from a saver to you. It creates a new deposit in your account and a matching debt in its records. The Bank of England describes this in its 2014 quarterly bulletin, and Richard Werner demonstrated it in a live bank loan in 2013.

Is it legal for banks to create money?

Yes. It is how the system is designed to work, and it is regulated. Banks need a licence, and rules limit how much they can lend against the capital they hold. What is unusual is not that it is hidden, but that it is almost never taught.

If banks create money, is my money actually in the bank?

Not as a pile of cash with your name on it. Your balance is a record of what the bank owes you. In the UK, deposits are protected up to £120,000 per eligible person, per authorised firm, by the Financial Services Compensation Scheme. That limit rose from £85,000 on 1 December 2025, so older guides you find online will be out of date. Always check the current figure on the FSCS website.

Why can't I create money if banks can?

Because creating money by lending requires a banking licence, and those are very hard to get. Getting one to run a bank that simply holds your money without lending it out is harder still. That story deserves its own page, and it is coming.

Does this mean money is not real?

Money is real in the way a promise is real. A bank deposit is a promise from a bank to pay you. It works because everyone accepts it. That does not make it fake. It makes it a very powerful agreement, and worth understanding.