The money your bank lends you doesn’t exist before the loan agreement is signed: it’s the loan itself that creates the money. The central bank, which first appeared with Sweden’s Riksbank in 1668, then adjusts that credit to the economy’s needs, but never hands it out itself over the counter.
Where does the money your bank lends you come from?
it’s credit itself that creates money, at the precise moment the loan is signed
When a bank grants you a loan, it isn’t dipping into savings that were already sitting idle in someone else’s account. The Économistes atterrés (a French economists’ collective) make the point clearly: it’s credit itself that creates money, at the precise moment the loan is signed. The money that appears in your account didn’t exist a minute earlier: it’s born the moment you commit to repaying it.
That individual act actually draws in the whole banking system, with every bank operating alongside the others and the central bank. The Économistes atterrés describe monetary policy as the art of adjusting that credit to the economy's real needs, neither too much nor too little. A more classical view, meanwhile, sees the money in circulation as a multiple of some starting base.
Since when has there been a central bank, and what does it actually do?
We often picture the central bank as an institution as old as money itself. That isn't the case: the first central bank is thought to have been Sweden's Riksbank, founded in 1668. Set against the long history of money, the institution is actually recent, far younger than the authority we credit it with today.
Its role shouldn’t be confused with that of the banks we deal with day to day. A report from Problèmes économiques (a French economic-affairs journal) points out that most of the money in circulation today is issued by private banks, while central banks enjoy an independence that lets them adjust that credit rather than hand it out themselves, counter by counter.
Why can’t a state simply finance itself through its central bank?
Since the Maastricht Treaty of 1992, eurozone states have no longer been allowed to borrow directly from their own central bank. It’s a principle of separation, designed as a safeguard between political power and the creation of money.
The reason given comes down to a single sentence: this kind of financing could send money creation spiralling out of control. In other words, if the central bank simply handed the state whatever money it needed, nothing would limit how much currency was put into circulation. The treaty doesn’t settle whether that risk actually justifies the rule: it lays down the separation as a principle and leaves the debate over its merits to others.
Does 4% inflation really put your savings at risk?
4% inflation means prices rise by that much every year, and the same amount of money buys a little less than before. Economist Tim Harford points out, though, that this erosion isn’t automatic: if your savings account pays interest that matches, or even outpaces, that 4% rate, your savings keep their purchasing power. So the real issue isn’t inflation itself, but the gap between its level and the return your savings are actually earning.
Tim Harford also notes that developed countries have been through periods like this themselves without any lasting damage to savings, so long as the rates banks offered kept pace with inflation. So before worrying about an inflation figure, it's worth checking what your savings are actually earning you.
Understanding where money comes from changes the way you listen to economic news: a credit adjustment, a central bank decision or an inflation figure stop being abstractions and become the visible result of these mechanisms, each one designed as a safeguard rather than a tap you could open at will. You don’t need to become an economist to keep this framework in mind, or to remember that savings left untouched quietly lose some of their value against an inflation rate that never stops on its own.
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