How does money creation by commercial banks work?

📘 Briefly explained Commercial banks create money by granting loans and crediting new book money to borrowers‘ accounts in the process. This book money is created out of nothing, because the bank does not have to first use existing deposits from other customers. It only needs sufficient equity capital and central bank money for payment transactions. When a customer takes out a loan, the bank simultaneously increases its claim against them and its liability in the form of the deposit. When the loan is repaid, the book money is destroyed again, so the money supply falls. The central bank influences this process through the key interest rate and minimum reserves, but cannot directly control money creation. 🔍 Why this matters Commercial banks create money by granting loans and simultaneously recording both a claim against the borrower and a liability t …