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The Illusion of Money: How Banks Create It Out of Thin Air, and What We Can Do About It

Discover how banks create money out of thin air, what Richard Werner’s groundbreaking research reveals, and why Bitcoin advocates like Saifedean Ammous call the fiat system a scam. Explore the future of money, inflation, and financial reform in this eye-opening deep dive.

Welcome back to our deep dive into the wild world of economics, where money isn't just printed—it's conjured like fairy dust. If you've been following the headlines on inflation, Bitcoin booms, and economic reforms in places like Argentina, you know money isn't as straightforward as it seems. Today, we're unpacking a fascinating thread: from Richard Werner's groundbreaking paper on bank money creation to global trends, critiques from Bitcoin advocate Saifedean Ammous, and the big debate on solutions. Buckle up—this could change how you think about your savings, investments, and the global economy.

Table of Contents

The Bombshell Paper: Can Banks Really Create Money from Nothing?

It all starts with Richard Werner's 2014 paper, "Can banks individually create money out of nothing? — The theories and the empirical evidence." Werner, an economist who's no stranger to challenging the status quo, tested three competing theories of banking:

Financial Intermediation Theory: Banks are just middlemen, shuffling deposits from savers to borrowers. No new money created.

 Fractional Reserve Theory: Banks lend out most deposits but keep a fraction in reserves; money creation happens system-wide via a "multiplier" effect.

Credit Creation Theory: Individual banks create money "out of thin air" by issuing loans—crediting a borrower's account while adding the loan as an asset on their books.

Werner didn't just theorize; he ran a real-world experiment. He borrowed €200,000 from a small German bank and monitored their records. The result? No funds were transferred from existing deposits or reserves. Instead, the bank simply made accounting entries, creating the money ex nihilo. This confirmed the credit creation theory: Banks drive money supply growth, with deposits following loans, not the other way around.

Implications? Unchecked bank lending can fuel asset bubbles and crises, as we've seen in 2008. But Werner argues it's not all bad—if directed productively, this "fairy dust" can spark real growth

Quantifying the Magic: Global Bank Money Creation and M2 Trends

So, how much money are banks conjuring annually? Using data from the IMF and BIS as proxies (focusing on changes in private non-financial sector credit, where banks dominate), we can estimate net global bank money creation. It's a proxy since it includes some non-bank credit, but banks handle 60-70% of it.

Here's a snapshot of recent years (in USD trillions):

2019: Annual Change in Private Debt +7; Estimated Bank Share +4 to +5

2020: Annual Change in Private Debt +17 (pandemic surge); Estimated Bank Share +10 to +12

2021: Annual Change in Private Debt +13; Estimated Bank Share +8 to +9

2022: Annual Change in Private Debt -6 (post-stimulus slowdown); Estimated Bank Share -4 to -4

2023: Annual Change in Private Debt -14 (deleveraging); Estimated Bank Share -8 to -10

2024: Annual Change in Private Debt +2 (modest rebound); Estimated Bank Share +1 to +1.5

Now, compare this to global M2 (broad money supply, ~$125-130 trillion in 2025). M2 trends mirror bank creation closely—spiking in 2020-2021, contracting in 2022-2023, and rebounding now. Banks explain 70-80% of M2 changes, but for the total stock, they create 90-97% (deposits), with central banks handling just 3-10% (currency).

This alignment screams endogenous money: Loans expand M2, driving booms and busts.

A Bitcoin Maximalist's Take: Saifedean Ammous Weighs In

Enter Saifedean Ammous, author of The Bitcoin Standard and The Fiat Standard. Through his Austrian economics lens, Werner's findings expose the fiat system's "scam." Banks don't create value—they debase it via "easy money," inflating away savings and favoring insiders (Cantillon effects). Fractional reserve banking? A cartel propped up by central banks; without bailouts, it'd collapse under runs.

Ammous would interpret Werner's paper like this: Credit creation is fiat's "mining" process, but corrupt—keystrokes conjure debt, raising time preference (short-term thinking) and funding wars/welfare. Solution? Bitcoin: Fixed 21 million supply, no counterparty risk, decentralized. Hold BTC, starve the beast, and reclaim sound money.

Ammous hasn't dissected Werner's paper verbatim, but their views align—he's even interviewed Werner. Fiat is "haram"; Bitcoin is salvation.

The Inflation Conundrum: Productive Lending vs. Fixed Supply

Drawing from Milton Friedman's "inflation is always a monetary phenomenon" (echoed in Javier Milei's Argentine reforms, which slashed inflation from 200%+ to low single digits via austerity), we hit the core question: If banks print for productive loans (e.g., SMEs building factories), does it still inflate?

From first principles:

- Inflation arises when money growth outpaces real output.

- Unproductive loans (assets like real estate) bid up prices without adding supply—inflationary.

- Productive loans boost output, potentially neutralizing inflation if balanced.

Werner's fix: Guide credit via local banks to goods/services production, not speculation. This could yield non-inflationary growth, as seen in post-war Japan.

Alternatives:

Fixed Supply (e.g., Bitcoin-style): No new money—deflation as output grows. Pros: No debasement, encourages saving. Cons: Stifles credit for growth, risks spirals.- Controlled Productive Lending: Flexible expansion tied to value creation. Pros: Supports innovation. Cons: Risk of misallocation.

Best bet? A hybrid: Start with fixed-like discipline (à la Milei) to curb hyperinflation, then shift to guided lending for sustainable growth. Inflation impact: 0-3% if managed, vs. potential deflation in fixed systems.

Wrapping Up: Toward a Sounder Future

Money creation isn't magic—it's a tool that can build or destroy. Werner shows banks hold the wand; Ammous warns of its dangers; real-world reforms like Milei's prove change is possible. For us? Diversify into hard assets (hello, Bitcoin), advocate for productive credit policies, and stay vigilant against fiat's illusions.

What do you think—fixed supply or guided growth? Drop your thoughts in the comments, and subscribe for more econ deep dives. Until next time, keep questioning the system!

This post synthesizes economic theories and data—always DYOR and consult pros for financial advice.

That's all for today, see ya tomorrow! If you want more, be sure to follow our X (@croxroadnewsco), Instagram (@croxroadnews.co), Youtube (@thebitcoinlibertarian), Tiktok (@croxroadnews) and nostr - [email protected]

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

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