HOW IS MONEY CREATED?
UNDERSTANDING THE SYSTEM
THAT SHAPES YOUR FINANCIAL FUTURE
Most people spend their entire lives working for money, yet very few truly understand where money comes from. We see numbers in bank accounts, salaries arriving each month, prices rising, and debts growing—but the system behind all of this remains invisible.
This lack of understanding is not accidental; when you don’t understand how money is created, you accept outcomes instead of questioning them. You react instead of planning, and you survive instead of designing your financial future. This article pulls back the curtain on the modern financial system. By the end, you will understand how money is created, who controls it, why debt plays such a central role, and—most importantly—how this knowledge can help you make smarter financial decisions and move closer to real freedom.
THE BIGGEST MYTH ABOUT MONEY CREATION
Let’s start with a common but dangerously misleading belief: “Governments print money.” While governments do print physical cash, this represents a very small fraction of the total money supply.
In most modern economies, over 90% of money exists digitally, created through bank lending. Money today is not primarily printed; it is created through credit. Understanding this single fact changes how you see debt, inflation, savings, and wealth.
THE TWO MAIN ACTORS
Modern money creation involves two key institutions that play different but interconnected roles:
Central Banks: The architects of the system (e.g., The Fed, ECB). They do not usually create money for everyday spending; instead, they control the conditions under which money is created by setting interest rates and regulating bank reserves.
Commercial Banks: This is where money is actually born. When a commercial bank gives a loan, it does not take existing money from someone else’s account. Instead, the bank creates new money digitally and credits it to your account. In that moment, a new asset and a new liability are born simultaneously.
UNDERSTANDING THE CYCLES
The financial system operates in recurring cycles. These cycles emerge from the interaction of money creation, debt-based incentives, policy decisions, and human behavior. Typical phases include:
- Credit expansion and increasing asset prices (driven by optimism).
- Rising confidence and excessive leverage.
- Market corrections or financial crises (shedding excess debt).
- Stabilization and the beginning of a new cycle.
Understanding these patterns helps reduce emotional decision-making and allows you to position yourself consciously within different phases of the system.
KNOWLEDGE VS. EMOTION:
A STRATEGIC APPROACH
Making investments based on knowledge rather than emotions is the hallmark of financial mastery. If I were navigating major financial events, my approach would be focused on protection against inflation and factual analysis:
Inheritance
If I were investing inheritance money sustainably, or deciding on an inherited property - what to do?, I would evaluate the current economic cycle to determine the most productive move.
Bonuses & Pay
My approach to investing bonuses or investing severance pay would be to move that capital into assets that generate long-term leverage rather than short-term consumption.
Retirement
Taking control of your own private retirement savings means making the hard, fact-based choices today to ensure your future independence.
WHY DEBT AND INTEREST ARE THE FOUNDATION
If money is created through loans, then debt is not a flaw in the system—it is the foundation. Every loan creates money, and every repayment destroys it. This explains why debt is everywhere and why economies require constant growth.
The Interest Pressure
Since banks create the principal of a loan but not the interest, new loans must be created continuously to pay off old interest. This creates an invisible pressure for the economy to expand.
Good Debt vs. Bad Debt
The system rewards those who use debt to finance assets and build leverage, while it punishes those who use it for consumption.
AWARENESS IS LEVERAGE
Money creation is not magic. It is a system built by humans and maintained by trust. You do not need to control the entire system to benefit from it. You simply need to understand it well enough to stop being controlled by it.
Freedom begins with the awareness that allows you to stop seeing money as something you chase and start seeing it as a system you navigate. Awareness turns money from a source of anxiety into a tool for designing your life.