In our modern financial system, banks do not actually lend “money” at all. That is to say, borrowers are not getting loans that come from the deposits of others. Banks create money out of nothing by extending credit against their capital through an electronic accounting entry (the credits become liabilities on their balance sheets). This is a startling revelation to many. Last year I read a book about investing in banks and the authors did not know this.
The Federal Reserve (central bank) issues coins and paper currency but this is only a small percentage of the overall money supply. Most of the money in our economy has come from bank credit creation. Really, most of what we call “money” is not really money at all, in the physical sense, but the net remainder of banking credits.
Nowhere have I heard this explained so eloquently as in the following presentation by Professor Richard Werner. (The explanation is laid out succinctly in about 10 minutes from the 15:20 to 25:00 portion of the video so fast forward to the 15:20 minute mark if you don’t want to watch the longer version.)