The following is my high school teaching assignment for Advanced Placement Macroeconomics students (available as extra credit for other classes) on how money is created. I offer this for non-profit use; divided into seven sections:


2. Money and bank credit

There are five topics to understand for civic competence in creating and managing money. The first four are standard to economics curriculum; the last is rational analysis:

  • Money and bank credit.
  • Fractional reserve banking.
  • Debt (public, private) and money supply.
  • Historical struggle between government-issued money and private bank-issued credit.
  • Cost-benefit analysis for monetary reform in your world of the present.

I promise you can easily understand each topic, and that your understanding will give you an informed policy voice over trillions of dollars. I make this promise with confidence because the mechanics of creating what we use for money can be understood by anyone when they see it for themselves. That said, you might be confused at first because the simple facts will be different from what you believed, and what you’ve heard from recent US presidents and central bank officials.

Please be advised that the ideas most people have about how money is created and managed are false. Because the facts are so different from what most people believe, cognitive dissonance will push some people to reject the facts. Please reaffirm your commitment to embrace the facts.

“The process by which banks create money is so simple that the mind is repelled.” – John Kenneth Galbraith, Money: Whence it came, where it went (1975), p.29. Galbraith wrote five best-selling books on economics (please imagine the public enjoying economics enough to read on their free time), was President of the American Economic Association, economics professor at Harvard, and advisor to four US Presidents.

I encourage you to verify and supplement the information in this paper through additional research.

My experience as a teacher is that the best tool to visualize this information is to literally see it through an online 78-minute video, Money As Debt II: Promises Unleashed (2) (and for your use: background (3) and transcripts of Money as Debt series). Four other sources of information that I recommend: an excellent overview of our monetary system (4) from Want to Know.infoincisive articles (5) (and here [6]) from Ellen Brown, and Stephen Zarlenga (7), and the documentary, Zeitgeist: Addendum (8), whose series has a stunning ~300 million views (9).

Importantly, all information I present to you has been shared in my public articles, international economics conferences, and among ~2,000 Advanced Placement Economics teachers on our Discussion Board since 2008. To date, nobody has found any part to be factually inaccurate or biased. A few AP teachers voice that they “don’t like” the Zeitgeist presentation, but when I ask if there’s anything inaccurate or incomplete with the facts, they have no responses.

Ready now?

Here we go:

Money and Bank Credit: 

“A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men who, even if their action be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who necessarily, by very reason of their own limitations, chill and check and destroy genuine economic freedom. This is the greatest question of all, and to this statesmen must address themselves with an earnest determination to serve the long future and the true liberties of men.” - President Woodrow Wilson, The New Freedom, Section VIII: “Monopoly, Or Opportunity?”, p. 185.

“I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. You tell me that if I take the deposits from the Bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out and, by the Eternal, (bringing his fist down on the table) I will rout you out.”  - From the original minutes of the Philadelphia committee of citizens sent to meet with President Jackson, February 1834, according to Stan V. Henkels, Andrew Jackson and the Bank of the United States (10), 1928

Money is broadly defined as anything generally accepted for trade. However, in the real world something is money only when the government authorizes it as “legal tender.” Its purpose is to facilitate trade. Fiat money (not exchangeable for a commodity that “backs” the currency) is all that’s required for this purpose because the government enforces its acceptance as payment. Commodity money is the attachment of money to a thing, like gold or silver. This is not needed for legal enforcement and introduces fluctuation as the value of the attached commodity changes. If you’re aware of the violent swings of the price of gold (11) (such as increasing in price over 700% within the life of any student born since 2002), you’ll understand the risk of a wildly fluctuating value of commodity money. Its proponents, like retired Congressman Ron Paul (12), argue that linkage to a thing of limited quantity is an acceptable tradeoff compared to their prediction of inevitable corruption of any system designed to limit the supply of fiat currency.

Bank credit is the legal power government has given banks to create quasi-money out of nothing and lend it to the public at interest. Your deposits to a bank are loans to them. The bank can legally take a percentage of your deposit (90 to really 100% through clever manipulations of regulations) and create new credit to lend to the public at interest. They are not lending your deposit, as most people envision. They are making the new credit out of thin air! Bank credit increases the supply of money, causes inflation (by definition as the supply increases), and devalues the money already possessed by the public. Inflation is a hidden tax on your money because purchasing power decreases with inflation. The banking industry benefits from this policy of creating credit out of nothing and lending it to us at interest, while the public has the costs of paying banks to “so-called borrow” credit at interest while existing money is devalued. I use the term “so-called borrow” because the loan wasn’t something possessed by the bank. The loan was created out of nothing when you asked for the loan. This can be difficult to grasp. Watching “Money As Debt II” will walk you through the process.

The fact that banks create credit out of thin air is verified by the Federal Reserve’s Publication, Modern Money Mechanics (13). Excerpts:

“The purpose of this booklet is to describe the basic process of money creation in a ‘fractional reserve’ banking system…The actual process of money creation takes place primarily in banks.”

“[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrower’ transaction accounts. Loans (assets) and deposits (liabilities) both rise by [the amount of the “loan”].”

The UK Guardian is Earth’s third most-read on-line newspaper. In a revealing 2014 article, The truth is out: money is just an IOU, and the banks are rolling in it (14), the author explains what the Bank of England (15) also admits:

What we use for money, bank credit, is created as debt by private banks.

When you understand the power of creating credit out of nothing, your mind will eventually take the next logical step and ask: why don’t we create money out of nothing to pay for public goods and services directly rather than surrender this awesome power to the banks? You’ll wonder: why doesn’t government create money to hire unemployed workers for all the infrastructure work that needs to be done?

You see all around you the validity of the American Society of Civil Engineer’s report card (16) for American infrastructure deserving its D+ grade. And, as you may know, infrastructure investment returns more value to the economy than input costs (17), so the $3.6 billion these engineers estimate is needed for the US could be created debt-free, create near full-employment, give us the infrastructure they list (and other cool investments like public transportation that can go 4,000 mph [18]), AND deliver these improvements while causing prices to go down!

So we don’t do this because instead we have…


2 Among many: TRUTH TV. From Feb. 2, 2013:

3 Gringnon, P. Money as Debt website:

4 Want to The Federal Reserve: Neither truly federal nor a full reserve:

5 Brown, E. Articles from 2007 to April, 2013. Web of Debt.

6 Brown, E. Articles from May, 2013 to present. Web of Debt blog:

7 Zarlenga, S., Coleridge, G. Huff Post. Reducing U.S. debt and creating jobs through public control of our money system. May 3, 2011:

8 The Zeitgeist film series:

9 The Zeitgeist film series. About:

10 more context: Herman, C. Washington’s Blog. President Andrew Jackson, Peter Cooper on monetary reform. March 8, 2012:

11 among many: Goldprice. Gold price history:

12 Paul, R. Ron Paul on gold & the Fed’s failed ‘Utopian Dream’. from Durden, T. Zero Hedge. Jan. 29, 2015:

13 Chicago Federal Reserve Bank. Modern Money Mechanics. From

14 The Guardian. Graeber, D. The truth is out: money is just an IOU, and the banks are rolling in it. March 18, 2014:

15 Bank of England. Mcleay, M; Radia, A; Thomas, R. Money creation in the modern economy. Q1 Bulletin, 2014:

16 American Society of Civil Engineers. 2013 Report Card for America’s infrastructure:

17 Josheski, D. Infrastructure investment and GDP growth: a meta-regression analysis. Sept. 1, 2008:

18 Herman, C. 43-second video: monetary & credit reform realizes this public transportation. April 21, 2012: