Ask most people where money comes from and you get one of two answers. The government prints it, or banks lend out what savers deposited. The Bank of England published a paper in 2014 that says both are mostly wrong. Banks do create money, but not by passing on deposits. They create it at the moment they make a loan.
That sounds like a trick, so this module lets you do it yourself. You will run a four-person economy, watch the books of two banks, and see exactly which numbers change. Then we check the idea against 67 years of US data and ask the question that matters: if banks can create money by lending, what stops them?
When a bank lends you $100,000, it doesn't go to a vault and count out other people's savings. It types a $100,000 loan into its books as an asset, and types a $100,000 balance into your account as something it owes you. Both entries appear at once. Nobody else's balance went down.
Your balance is money. You can spend it, and the seller accepts it as payment. So the bank has made money by recording a loan. The Bank of England puts it plainly: lending creates deposits, not the other way round.
Try it below. Start with step 1, then follow the money.
Two banks, a borrower (Ben) and a seller (Sam). Each step shows both sides of every balance sheet. The big number counts deposits held by Ben and Sam. Reserves aren't counted, because you can't spend them.
Press "1 · Lend Ben $100,000" and watch both sides of Bank A.
Three things to notice. First, the lend step raised the amount of money and left Bank A's reserves alone. Second, when Ben spends, the deposit moves to Bank B and reserves move with it, because banks settle with each other in central bank reserves. The total doesn't change. Third, repaying the loan wipes out the deposit. Money made by lending disappears when the loan is repaid.
Reserves are a different thing from deposits. Reserves are the balances banks hold at the central bank, used to settle payments between banks. You and I never hold them. Deposits are what you and I hold, and they make up most of the money we use.
Paper and coin is the only central bank money the public can hold. Everything else we spend is a balance at a bank. In the US, paper and coin held by the public is about a tenth of the broad money measure called M2. The rest is deposits and similar balances.
Switch between the share of paper and coin in M2 and the dollar amounts. M1 was redefined in May 2020, which is why it jumps.
In September 2026, paper and coin was 10.2% of M2 ($2.40 trillion of $23.41 trillion). The share has stayed between 6.6% (December 1986) and 11.3% (November 2018) since 1959. Bank money has been the large majority for as long as the data goes back.
If a bank can type money into existence, why isn't there infinite credit? Many textbooks say the limit is reserves, and call the system fractional reserve banking: a bank must hold a fraction of its deposits in reserve, so each deposit supports only so many loans. That is the money multiplier. If the requirement is 10%, then $100 of reserves can support $1,000 of deposits.
The data doesn't behave like that. In October 2007, US M2 stood at 176.5 times reserves. In August 2014, after the central bank flooded the system with reserves, it was 4.0 times. In September 2026 it was 7.9 times. A fixed multiplier would hold steady. And since 26 March 2020 the Federal Reserve has set the US reserve requirement to zero percent. If reserves were the brake, US banks could now lend without limit. They can't, and they don't.
Reserves jumped after 2008 and again in 2020. Loans kept growing. Money per dollar of reserves is nowhere near a fixed number.
The Bank of England lists what does limit lending. Profit: a bank only makes a loan if it expects to be paid back with interest, at a rate that covers its own funding costs and the risk. Capital: a loan is an asset, and regulators require a bank to hold a minimum of its own money against its assets, so a bank can't grow its loan book faster than its capital allows. Demand: a loan needs a borrower, and fewer people borrow when rates are high. The policy rate: the central bank sets the rate that all of these decisions are priced from.
There's one more limit, and the next simulator shows it. A bank that lends more than its depositors will keep in the bank can be run. Nobody sets that limit by decree. Depositors do.
You run a goldsmith's vault with 100 bars. Issue more receipts than you hold bars and you earn fees, but a rumour can make holders ask for gold at once. Add a deposit insurer and see who carries the risk.
That is the same story as a modern bank, with the dials turned. Lending more than you hold in reserve is the whole business. It pays, and it makes you fragile. Deposit insurance, central bank lending and capital rules exist to manage that fragility. They don't remove it. They move some of the risk to other people, which is what the insurer did for you above.
When a bank makes a loan, it records the loan as an asset and at the same moment credits the borrower's account with a new deposit. No saver's balance goes down. The Bank of England put it this way in 2014: lending creates deposits, not the other way round. Repaying the loan removes the deposit again.
Not the way textbooks tell it. The money multiplier story says reserves cap lending, but US M2 was 176.5 times bank reserves in October 2007 and 4.0 times in August 2014, so the ratio is not fixed. The Federal Reserve has set the US reserve requirement at zero since 26 March 2020.
Expected profit, bank capital, demand from borrowers and the central bank's policy rate, according to the Bank of England. A bank also needs its depositors to stay: lend too much against what it holds and it can be run.
Most of it. Bank deposits were 97% of UK broad money in December 2013, per the Bank of England. In the US, paper and coin held by the public was 10.2% of M2 in September 2026 ($2.40 trillion of $23.41 trillion). The rest is deposits and similar balances.