Section 2 — How Money Works
Session 5 of 16
Monday, April 20, 2026
How banks create money
This session reveals one of the most important — and least understood — facts about the modern economy: 97% of all money in circulation was created by private banks, not governments. You'll learn the vocabulary of money creation, fractional reserve banking, and leverage, and you'll begin to understand why banks hold such enormous power over the economy — and over your life.
Vocabulary for this session
fractional reservemoney supplydepositreserve ratiomoney multipliercredit creationcommercial bankliquiditysolventinsolventbank runcapitalleverageassetliability
Grammar focus
Grammar focus: Passive voice for financial processes — "Money is created by banks through lending." "Loans are issued when a customer is deemed creditworthy." "Deposits are held as partial reserves." The passive voice is the standard register for financial reporting and analysis.
Come prepared to discuss
"Should private banks be allowed to create money, or should only governments control the money supply?" This is one of the most contested questions in economics — and most people don't even know it exists.
Before this session
Prepare: Before this session, search online for "fractional reserve banking" and read one short paragraph — even a dictionary definition is enough. Then write one sentence in English that explains, in your own words, what you think it means.
Task-Based Activity
The money creation chain. Set up a chain of deposits and loans across the class. Give Student A a card saying "You deposit $1,000 in Bank 1." Bank 1 (another student) keeps 10% ($100) as reserve and lends $900 to Student B. Student B deposits $900 in Bank 2, which keeps $90 and lends $810, and so on. Track the running total on the board. After 5-6 rounds: "How much money now exists from the original $1,000 deposit?" (Answer: up to $10,000 with a 10% reserve ratio — the money multiplier effect.) Debrief: "How is this possible? What are the risks? What happens if everyone wants their money at once?"
Career-Oriented Take — How to Frame It
Anyone working in finance, accounting, investment, or business management needs to understand leverage. A company described as "highly leveraged" has borrowed heavily against its assets — high reward but high risk. Knowing whether a business is solvent (assets exceed liabilities), liquid (can pay short-term debts), or over-leveraged is core financial literacy for any senior professional. This vocabulary appears in every annual report, every credit rating, and every investment analysis.
Big Picture — Global Financial Order
97% of money in circulation today was created by private banks through lending — not printed by governments. This means private banks effectively control the money supply and therefore the pace of economic growth. When banks choose to lend, money expands; businesses grow, employment rises. When banks stop lending (2008), money contracts, businesses fail, and recessions begin. The 2008 global financial crisis was precisely this: banks stopped trusting each other, interbank lending froze, and the money supply contracted catastrophically. Understanding money creation is understanding why the financial system is so fragile.
Current Events Take
Post-2020, central banks around the world engaged in massive quantitative easing (QE) to survive COVID — the Fed, ECB, and Bank of England all created unprecedented amounts of new money. Commercial banks simultaneously extended record amounts of credit. The combined result: asset prices soared (stocks +100%, housing +30-50% in many markets), then inflation — suppressed for a decade — returned with force. Students who understand money creation can read every one of these headlines intelligently: they understand why this happened, not just that it happened.
Homework (assign after session)
Watch the Bank of England's short video "Money Creation in the Modern Economy" (available on YouTube, approx. 8 minutes). Write 3 things that surprised you and explain why: "I was surprised to learn that… because I had always thought… This changes how I think about…"