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

We want our money to be safe and stable. However, this is not guaranteed in our current monetary system. Inflation alone continuously erodes the value of our money. Inflation can arise from increased demand, supply fluctuations, and also when the money supply is expanded without limits. 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 issuing loans to banks and buying . You can read more about inflation here.

What many of us don't know: It is not only the central bank that creates new money, but also the banks themselves. This is known as "internal" money creation or also credit money creation. Let's take a closer look at today's banking system: Perhaps you have also thought about where the banks get all the money that they lend out as personal and business loans. Many people think that the loans come from the deposits we have in our bank accounts. This is not the case. To a large extent, the banks grant loans independently of the deposits. They create this money out of nothing, so to speak. This phenomenon of credit money creation, which is 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 using a concrete example:

Carla Credito needs CHF 20,000 for her hairdressing business. Her bank grants her this loan. However, the bank does not take the amount from the bank account of another bank customer. No, it books the CHF 20,000 "virtually out of nothing" as a credit on Carla Credito's account. In its own accounts, it books the CHF 20,000 on the liabilities side of the balance sheet as a liability (loan) to Carla Credito. However, as banks always keep so-called double-entry bookkeeping, the bank also books the same amount on the assets side as a receivable (loan receivable) from Carla Credito. It does this because Carla Credito has to repay the CHF 20,000. The bank has therefore simply created new money in the amount of CHF 20,000 that did not previously exist. This additional money will of course be destroyed again as soon as she repays the loan.

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

Limited money creation

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

The banks' money creation model harbors various risks and is closely linked to the concept of credit money creation. Banks grant loans, some of which are not covered by deposits, but are created out of "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 a risk of a bank run in which a large number of customers want to withdraw their deposits at the same time, which can lead to liquidity problems. As a result, the bank may become insolvent, which could lead to customers losing their deposits.

A recent example of a bank run occurred in the US in March 2023, when Silicon Valley Bank and Silvergate Bank were affected. This was reminiscent of similar events in the past, such as the post-2007 financial crisis, which triggered a run on banks such as the UK's Northern Rock Bank and Switzerland's UBS. Another historical example is the bank run following the New York Stock Exchange crash of 1929, in which around 40 percent of American banks went bankrupt.

The creation of money by banks is the subject of intense debate today. In addition to the risk of bank failures, it is also criticized that banks mainly create money when the economy is booming. In times of crisis, however, there is a shortage of money. This helps to reinforce bubbles, financial crises and inflation.

It is therefore not surprising that voices are increasingly being raised calling for greater control of money supply growth. Some even go so far as to advocate an alternative financial system that offers our deposits more security and stability. To sustainably solve the current problems associated with banks and their credit money creation, various alternative financial models based on fair, democratic and decentralized principles are being explored - such as cryptocurrencies, like Bitcoin, Ethereum or Solana. Unlike conventional 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 see cryptocurrencies as part of a solution for a stable and independent monetary system.