Stage I · Foundations · STEP 2

Money is credit, not a thing

Most money is created by banks when they lend, and destroyed when loans are repaid. Grasp that and half of macro stops being counter-intuitive.

Why this matters

The single most useful correction in all of finance: money is not a pile of coins the central bank hands out. Most of it is a promise — a deposit created the moment a bank makes a loan, and extinguished the moment the loan is repaid. The Bank of England says so in plain English; almost nobody who argues about the money supply has read it.

Once you hold this, the questions that used to feel paradoxical resolve. Why can the central bank cut rates and still see credit contract? Why does paying down debt shrink the money supply? Why is a bank run a run on promises rather than on cash?

It also builds the habit that carries through the rest of the course: when someone says 'the money printer', you can ask which balance sheet, which account, and whether the quantity of money or its price is the thing actually moving.

Watch

Money & Macro (Joeri Schasfoort) ↗
The cleanest explainer of how banks create money and how central banks operate, with the accounting shown rather than asserted.
Eurodollar University (Jeff Snider) ↗
Heterodox, and worth it: unmatched on the dollar-funding system. Take the plumbing, leave the polemic.

Read — our own explanation

Verify at the source

BEFORE YOU MOVE ON

You can explain why repaying a loan shrinks the money supply, and why the central bank does not set the quantity of money directly.

← Step 1: What the economy actually is · Step 3: The price of time →