How banks create money
A modern commercial bank does not lend out savers' deposits. It writes a loan and a matching deposit into existence in the same keystroke. Most of the money in the economy was made this way. Drive the books yourself, then decide what you think.
Drive the bank yourself
Below is a real (if simplified) commercial bank. On the left: assets — what the bank owns or is owed. On the right: liabilities + equity — what the bank owes. The two sides must always balance.
Right now the bank has $200 in reserves at the central bank, an existing $1,000 loan book, deposits of $1,000 from existing customers, and $200 in equity. Tidy.
Click Issue loan → Alice. Watch what does not happen: the reserves don't move. No money is taken from anywhere else. Two new lines appear simultaneously — a loan asset (Alice owes the bank) and a deposit liability (the bank owes Alice). The money supply just grew.
This is the entire mechanism. There is no vault to draw from, no saver who is now $500 lighter. The bank typed two numbers, balanced its books, and the economy has more money than it did a moment ago.
If banks can conjure money, why aren't they infinite? Three constraints:
Reserves. When Alice spends her new deposit, the recipient's bank wants real reserves. Try the withdraw cash button — reserves drain. Run a bank dry and it has to borrow from another bank or from the central bank, at a price.
Equity. Loans go bad. Try defaults — the loan vanishes from assets but the deposit it created is still owed to someone. The shortfall hits equity. Enough defaults and the bank is insolvent.
Profitable demand. A loan is only made if the bank thinks it'll be repaid with interest. Recessions, falling collateral, or rising rates kill that calculation; new lending stalls; money supply contracts even with rates near zero.
The central bank doesn't print most of "money." It sets the price of reserves — the policy rate — and the system of rules and buffers banks must hold against their lending. Cheaper reserves and looser rules → more bank lending → more bank-created money. The opposite squeezes it.
This is why rate decisions cascade. The Fed isn't pushing money out; it's adjusting the cost of the input every commercial bank uses to make money.
Your savings rate is not the country's lending capacity.
When you read "Americans aren't saving enough so banks can't lend," be skeptical. Banks aren't reserve-constrained the way the metaphor implies; they're capital-constrained and demand-constrained. The variable to watch for whether credit is loosening or tightening is bank lending standards (the SLOOS survey) — not deposit growth.