This is how money is created and what it has to do with your savings.

We desire security and stability for our money. However, these are not guaranteed in our currency system. Inflation continuously devalues our money. Inflation can arise from increased demand, supply fluctuations, and also when the money supply is expanded without limit. This is done by central banks, such as the European Central Bank (ECB), the Swiss National Bank (SNB), or the Federal Reserve. They create cash and electronic money by granting loans to banks and purchasing government bonds. Here you can read more about inflation.

What many of us do not know is that not only central banks create new money, but also the banks themselves. This is known as "internal" money creation or credit money creation. Let's take a closer look at today's banking system: you may have wondered where banks get all the money they lend as personal and business loans. Many believe that the loans come from the deposits we have in our bank accounts. This is not the case. Banks grant loans largely independently of deposits. They essentially create this money out of thin air. This phenomenon of credit money creation, regulated by central banks such as the European Central Bank (ECB), the Swiss National Bank (SNB), or the Federal Reserve, is an important aspect of the modern financial system.

Let's explain this with a concrete example:

Carla Credito needs 20,000 CHF for her hairdressing business. Her bank grants her this loan. However, the bank does not take the amount from another customer's bank account. No, it credits the 20,000 CHF "almost out of nothing" as a balance in Carla Credito's account. In its own accounting, the bank records the 20,000 CHF on the liabilities side of the balance sheet as a liability (loan) to Carla Credito. However, since banks always maintain double-entry bookkeeping, the bank also records the same amount on the asset side as a receivable (loan receivable) from Carla Credito. It does this because Carla Credito has to repay the 20,000 CHF. Thus, the bank has simply created new money that did not exist before, amounting to 20,000 CHF. This additional money will, of course, be destroyed again as soon as she repays the loan.

This is referred to as "book money." The amount is recorded but can be used just like cash. Carla Credito uses it for her hairdressing business. This way, money circulates in the economy and can be deposited back into bank accounts. Through this process of lending, spending, and depositing, money increases in the banking system. This is known as money creation through credit money.

Limited money creation

When creating money, banks are partially bound by minimum reserves. Banks are required to keep a certain percentage of their loan grants as a cash amount in their central bank account. The minimum reserve ratio is currently set at 2.5%. These minimum reserves serve to ensure the liquidity and stability of the banking system and are established and monitored by central banks such as the European Central Bank (ECB), the Swiss National Bank (SNB), or the Federal Reserve.

The money creation model of banks carries various risks and is closely linked to the concept of credit money creation. Banks grant loans that are partly not covered by deposits but arise from what is called "nothing." This phenomenon is known as the credit multiplier and is based on the principle of minimum reserves that banks must hold with central banks. Nevertheless, there is the risk of a bank run, where a large number of customers want to withdraw their deposits simultaneously, which can lead to liquidity problems. As a result, the bank may become insolvent, potentially causing customers to lose their deposits.

A recent example of a bank run occurred in March 2023 in the USA, affecting Silicon Valley Bank and Silvergate Bank. This was reminiscent of similar events in the past, such as the financial crisis following 2007, which triggered a rush on banks like the British Northern Rock Bank and Swiss UBS. Another historical example is the bank run after the New York Stock Exchange crash of 1929, during which about 40 percent of American banks became insolvent.

The money creation by banks is currently being intensely discussed. Besides the danger of bank failures, it is also criticized that banks primarily create money when the economy is booming. In times of crisis, however, there is a lack of money. This contributes to the intensification of bubbles, financial crises, and inflation.

Therefore, it is not surprising that increasing voices are calling for stricter control of money supply growth. Some even advocate for an alternative financial system that offers more security and stability for our deposits. Various alternative financial models are being explored to sustainably address the current issues related to banks and their credit money creation, based on fair, democratic, and decentralized principles—such as cryptocurrencies like Bitcoin, Ethereum, or Solana. Unlike traditional currencies, cryptocurrencies cannot be devalued by central banks or governments. Furthermore, crypto assets cannot simply disappear in the event of a crisis. It is, therefore, not surprising that more and more people view cryptocurrencies as part of a solution for a stable and independent monetary system.