When a bank makes you a loan, it doesn't move money from another depositor's account. It creates new money on a ledger. The Bank of England confirmed this explicitly in 2014. Here is the 5-step mechanism, the implications, and why Bitcoin's issuance schedule matters in contrast.
READING TIME: ~8 MIN
Banks do not lend out other people's deposits. They create new deposits when they make loans. The loan is the asset on the bank's balance sheet, the deposit is the liability, and both come into existence in the same transaction. This means almost every dollar in your checking account exists because someone else borrowed. Recessions are credit contractions - when loans get repaid faster than new ones are issued, the money supply actually shrinks.
For decades, introductory economics textbooks described banking as a simple intermediary process: depositors put money in, the bank keeps a fraction in reserve, and lends the rest out. New loans were supposed to be funded by existing deposits. This is the "loanable funds" model.
It is wrong, and the major central banks have now publicly said so. The Bank of England's 2014 paper "Money creation in the modern economy" was the cleanest debunking. The Federal Reserve and ECB have made similar statements. Banks do not need a depositor to lend - they create the deposit by lending.
If you believe banks just intermediate existing money, the money supply looks fixed and inflation looks like a Fed problem. If you understand banks create money on demand, the money supply looks elastic and inflation looks like a policy choice. Most public debate operates on the wrong model.
Walk through what happens, in order, when you take out a $300,000 mortgage. No money moves from a vault. No depositor's balance changes. The bank executes a sequence of ledger entries and new money exists.
Loans create deposits. Deposits do not create loans. Repayment destroys deposits. This is the actual mechanism, and it is now stated explicitly in central bank publications.
The Bank of England's 2014 Q1 Quarterly Bulletin contained two papers - "Money in the modern economy: an introduction" and "Money creation in the modern economy" - that walked through the same mechanism described above. The papers were unusual in that they explicitly contradicted the textbook story.
"Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money."
McLeay, Radia, Thomas - Bank of England Quarterly Bulletin 2014 Q1The same paper noted that the textbook "money multiplier" model - where the central bank controls reserves and that controls lending - "is not an accurate description of how money is created in reality." The Federal Reserve and the ECB have published versions of this same correction in subsequent years.
Once you understand that loans create money, several features of the modern economy stop being mysterious.
The 2020 reserve-requirement change is also relevant here. Before March 2020, U.S. banks were required to hold 10 percent of deposits in reserve at the Fed. The Fed eliminated reserve requirements entirely in March 2020 [VERIFY]. The constraint on lending is now capital adequacy and loan demand - not reserves.
Bitcoin's issuance is non-discretionary. New bitcoin enters circulation only as a block reward to miners who solve the proof-of-work puzzle. The reward halves approximately every four years (the halving) and the total supply asymptotes to 21 million coins.
No bank can extend a bitcoin-denominated loan that creates new bitcoin. A bank could lend bitcoin it already has on hand - the way a custodian might - but it cannot conjure new bitcoin into existence by booking an IOU. The asset is finite by protocol.
The supply expands and contracts based on credit demand and central bank policy. A 41 percent expansion in 25 months is possible (and happened in 2020 to 2022). There is no hard cap.
Issuance follows a published schedule. Every halving cuts new issuance in half. The 21 million cap is enforced by every full node. No vote, election, or emergency can change it.
This contrast - elastic credit money versus a hard-cap monetary asset - is the entire reason Bitcoin exists. See Stock to Flow and Monetary Premium for the deeper economics.
Last updated 2026-04-14. Not financial advice. Do your own research.