How does a bank create money?
97% of money in the modern economy is created by banks when they make loans. The government only create 3% of money.
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Basically, banks take money from one person (or many people) and lend it to other people.
2 of the ways banks get money to lend is by taking other peoples’ savings deposits and also by borrowing money from the US government.
When people deposit money into a bank account, the bank pays them an amount based on how much they deposit. Let’s say banks pay 1% for deposits. And they have 10 people who have deposited $1000 each. The bank will pay each one of these people 1%.
The bank will take those deposits and lend that money to someone else at 10%.
This difference between what banks pay depositors and what they charge borrowers is called a spread.
In the above example the spread is the difference between the 10% lending rate and the 1% deposit rate.
This is the basics of how a bank creates money.
