How Does the Banking System Actually Create Money?

The banking system creates money by lending it to people and businesses, just like when you lend your toys to a friend.

Imagine you have a piggy bank with $100 inside. That’s real money, cash you can touch. Now imagine you go to the bank, and they give you a loan of $100. You don’t take the money from their piggy bank; instead, they just write it on a piece of paper (or in a computer), saying you now owe them $100.

Now you have $100 that wasn’t there before, new money! And when you spend that money at the store, the shopkeeper might put it back into the bank. The bank can then lend that same money to someone else, like a friend or another kid in your class.

This is how banks make even more money:

1. A bank gives out loans using money they already have.
2. That money gets spent somewhere else.
3. The bank gets it back and can give it to someone new.

It’s like sharing a big cookie, one kid eats a bite, then passes the cookie on. Soon, everyone has had a bite!