First Thing

Studies of how the economy works

FT-001The life of a money, part 2

Where money comes from

Most money is a bank's promise: a loan creates it, and repayment destroys it. Notes and coin are a minority. Real value is made by producing what people want. Over decades and countries, faster money growth moved with faster inflation, and with real growth weakly or not at all. A share that doubles creates no money.

Tap or click a dot for its source, a number for where it comes from and an underlined word for its meaning.

When your bank lends someone the price of a car, where does that money come from? It is not other people's savings handed over, and it does not come from the central bank's printing presses. The bank writes it. This study follows money to where it is made today and to where it first came from. The study keeps money, real value and prices apart. Money is the set of promises that settle payments: notes, bank deposits, and what banks hold in their accounts at the central bank. Real value is the goods and services people make, and the things they make them with, such as tools and machines. Prices say how much money it takes to buy something, from a coffee to a share or a house.

Short versionComplete on its own. About 2 minutes to read.

The answer in brief

Most money is a bank's promise. A bank creates it when someone borrows, and it is destroyed when the loan is repaid (who creates money). Notes and coin are a small part of the money people hold: in August 2026, 10.2% in the United States, 9.2% in the euro area and 3.2% in Britain, on each central bank's broad measure of money (for Britain, notes held by banks included). Real value is made by producing what people want, and prices say how much money it takes to buy it. Over the long run and across countries, faster money growth has moved together with faster inflation, and with faster real growth only weakly or not at all.

  • In normal times, a central bank sets an interest rate, not the amount of money the public holds. When it buys bonds from the public, as central banks did on a large scale from 2008 to 2022, it adds to that amount directly, though it still does not set it (what central banks control).
  • Real value is made by producing, not by printing. It comes from producing more with the same hours of work, and from trades that leave both sides better off. Across countries and over decades, money growth moved with inflation and little with real growth, in the reading of Lucas and of McCandless and Weber (where real value comes from).
  • Prices say how much money it takes to buy real value, and a higher price is not more money. A share that goes from $20 to $40 raises its holder's wealth but creates no money. A bank loan taken against that share does create money. Higher share and house prices can act on shop prices (the prices of the goods and services people buy) only through spending. Whether that spending raises shop prices depends on what the economy can produce (when a share doubles).
  • Inflation is a broad fall in what money buys, and it has more than one origin. Each of four origins mattered in some episodes: money growing far faster than output, demand beyond what the economy can produce, supply shocks, and states paying for their spending by creating money. Over whole decades and across countries, money growth moved with inflation most closely when it was fast (money growth and inflation by pace). At the extreme, people get rid of a money as fast as they can: its notes multiply, and all of them together buy less and less (what happens in a hyperinflation).

How banks create and destroy money is the Bank of England's own account. The shares of notes and coin are our own count. The points on prices and on inflation are our judgement, drawn from the sources and the cases that each section names.

The first part of this series asked what gives a money its value. The next part asks what has kept value when money lost it.

This study explains how money works. It is not investment advice, and it makes no forecast.

Read the full study.

Next section

Most money today is a bank's promise

Read “Most money today is a bank's promise” on the one-page version

Next section

Banks create money when they lend, within limits

Read “Banks create money when they lend, within limits” on the one-page version

Next section

If money is created all the time, why is everyone not rich?

Read “If money is created all the time, why is everyone not rich?” on the one-page version

Next section

In John Law's France, did printing notes to keep a share price high protect the money?

Read “In John Law's France, did printing notes to keep a share price high protect the money?” on the one-page version

Next section

When a share doubles, is money made?

Read “When a share doubles, is money made?” on the one-page version

Next section

Do rising share and house prices raise shop prices?

Read “Do rising share and house prices raise shop prices?” on the one-page version

Next section

Who gains and who pays when money is created?

Read “Who gains and who pays when money is created?” on the one-page version

Next section

If not central banks' "money printer", what should you watch?

Read “If not central banks' "money printer", what should you watch?” on the one-page version

The studies behind this answer

7
  1. Notes and coin as a share of the money people holdIn the latest month, notes and coin were 10.2% of broad money in the US, 9.2% in the euro area and 3.2% in Britain, each as its central bank counts it.The US since 1959, the euro area since 1980 and Britain since 1982, with IMF statistics for a wider set of economies
  2. Money growth and real growth, decade by decadeThe chart draws 580 decades from 152 economies, real growth against money growth, as Lucas drew them: a picture of his finding, not a test of it.Decades from 1960 to 2020, from IMF, World Bank, FRED and ECB series
  3. Money, real output and prices in the US since 1959From 1959 to 2025, US M2 grew 6.5% a year on average, real output 3.0% and prices 3.2%. How often each dollar was spent fell slowly.The United States, 1959–2025, FRED
  4. Where US households' real wealth came fromFrom 1952 to 2025, US households' real net worth rose $166.5 trillion, with $79.9 trillion of it from real holding gains on real assets and shares.US households and nonprofits, 1952–2025, quarterly, the Fed's Z.1
  5. Money growth and inflation by paceWhere base money grew faster than 12% a year, each extra point went with about one more point of inflation (1.07); below that pace, with 0.25 of a point.Decades from 1950 to 2020, from IMF, World Bank, FRED and ECB series
  6. Base against broad money in calm decadesIn calm decades, each point of base money growth went with 0.12 of a point of inflation, and each point of broad money growth with 0.39. The gap was 0.27.Calm decades from 1960 to 2020, from the same series
  7. Money growth in 2020–2021 and inflation in 2022–2023Where inflation was calm in 2015–2019, each point of broad money growth in 2020–2021 went with 0.27 of a point more inflation in 2022–2023, or 0.10 allowing for 2021's inflation.Economies with calm inflation in 2015–2019, IMF statistics, money growth over 2019–2021 and inflation over 2021–2023

Get next week's study by email

One email a week with the new study, a few days before it is on LinkedIn.

For people aged 16 and over.

Terms

23
supply shock
A sudden change in what an economy can produce, such as a jump in the price of oil, that raises prices while the quantity sold falls. Example: When oil producers cut their supply, fuel prices jumped while less fuel was sold.
near-money
A short-term promise to pay money, such as a share in a money-market fund: close to money, counted as money by some statistics and not by others. Example: A share in a money-market fund is paid out in deposits on demand, so many treat it as money; the US M2 counts the retail ones.
money-market fund
A fund that holds very short-term debt and whose shares can be turned into deposits on demand, so its shares are close to money. Example: Idle cash in a brokerage account is often placed in a money-market fund, from which it can be withdrawn the next day.
broad money
The money the public holds: notes and coin plus bank deposits, and some near-monies, as each statistic defines it (M2 in the US, M3 in the euro area, M4 in Britain). Example: Your current account and the notes in your wallet are both broad money; the reserves your bank holds at the central bank are not.
repurchase agreement
A sale of a security with a promise to buy it back soon at a set price: in effect, a short loan with the security as its pledge. Example: A firm lends spare cash to a bank overnight: the bank sells it a government bond today and buys it back tomorrow for slightly more.
base money
Notes and coin, which the central bank issues and, for coin, the state, plus the reserves banks hold in their accounts at the central bank. Example: When the central bank buys a bond from a bank, it pays with new reserves: base money rises, and the public's money does not change.
deposit
The balance in a bank account: a record of what the bank owes its customer, payable in central-bank money on demand. Example: When a bank lends you the price of a car, it writes that sum into your account: a new deposit, which you can spend.
reserves
Money banks hold in their accounts at the central bank, used to settle payments between banks. Only banks hold them. Example: When you pay someone at another bank, your bank sends reserves to theirs through their accounts at the central bank.
quantitative easing
A central bank buying bonds on a large scale, paying with new reserves. Bought from the public rather than from banks, it creates deposits too. Example: From 2008 the Fed bought government bonds and mortgage bonds by the trillion, paying with reserves it created.
reverse repo
Here, a short loan to the central bank, often overnight: the lender hands over money, takes a bond as pledge, and is repaid with interest. Example: A money-market fund cannot hold reserves at the Fed, but it can lend the Fed money overnight through a reverse repo.
real value
Goods and services people want, and the means to make them; what money is a claim on, measured by what money buys rather than by its amount. Example: A bakery that bakes more bread with the same flour and hours has made more real value; printing more notes has not.
value added
What a firm produces less what it bought from other firms: the national accounts' measure of value made. Example: A baker who sells bread for more than the flour, power and rent cost adds the difference to the economy's output.
velocity
How many times, in a year, the money stock pays for the economy's output: output in money terms divided by the money stock. Example: If the money stock is a third of a year's output, each unit pays for output about three times a year.
holding gain
A rise in the price of something held: it raises its holder's wealth, but no money is created by it. Example: A house bought for one price and now worth more is a holding gain until it is sold: wealth, not money.
net investment
What households added to their wealth by acquiring homes, firms and financial assets, less their new borrowing and the wear on what they own, as the Fed's accounts count it. Example: A family that pays from its income for an extension to its house adds to net investment.
real net worth
What households own minus what they owe, measured after inflation. Example: A household with no debt whose assets rise in a year exactly as fast as prices has the same real net worth.
hyperinflation
Prices rising so fast that people get rid of the money as fast as they can. Example: In Hungary in July 1946, prices doubled in less than a day.
margin of error
The range within which the true figure probably lies, given the noise in the data. Example: A survey puts a party a little ahead, but its margin of error runs from a narrow loss to a clear win.
monetary union
Several countries sharing one money and one central bank. Example: The euro area is a monetary union: its countries share the euro and the European Central Bank.
real balances
The money people hold measured by what it buys: the amount of money divided by a price index. Example: If the notes in circulation double while prices quadruple, real balances halve: all the notes together buy half as much.
seigniorage
What a state gains from issuing money, counted two ways: as the new money it issues, or as the interest a central bank earns on assets bought with money that pays little or nothing. Example: A state that pays its bills with new notes takes seigniorage in the first sense; a central bank earning interest on bonds bought with its notes takes it in the second.
inflation tax
What inflation takes from the real value of central-bank money, notes and reserves; with reserves now earning interest, we read its net weight as falling chiefly on notes. Example: If prices rise by a tenth in a year, the notes you held all year buy a tenth less: that loss is the inflation tax.
policy rate
The interest rate a central bank sets for its own money, which other short-term rates follow. Example: When the Fed raises its policy rate, banks soon pay and charge more on short loans.

Where the numbers come from

112

The answer in brief

  1. 10.2% % of M2, notes and coin held by the public, share of M2, 2026-08, the United States In the text: 1a 1bFirst Thing, computed. As of 10 October 2026. How it is computed.
  2. 9.2% % of M3, notes and coin held by the public, share of M3, 2026-08, the euro area In the text: 2a 2bFirst Thing, computed. As of 10 October 2026. How it is computed.
  3. 3.2% % of M4, notes and coin in circulation, banks' holdings included, share of M4, 2026-08, Britain In the text: 3a 3bFirst Thing, computed. As of 10 October 2026. How it is computed.
  4. $20 dollars, an example share price, before it doubles, any time, an example In the text: 4a 4bFirst Thing, computed. As of 11 October 2026. How it is computed.
  5. $40 dollars, an example share price, after it doubles, any time, an example In the text: 5a 5bFirst Thing, computed. As of 11 October 2026. How it is computed.

If not central banks' "money printer", what should you watch?

  1. 580 windows, ten-year windows drawn, 1960-2020, a grid of economies In the text: 103aFirst Thing, computed. As of 1 October 2026. How it is computed.
  2. 152 economies, economies drawn, 1960-2020, a grid of economies In the text: 104aFirst Thing, computed. As of 1 October 2026. How it is computed.
  3. 6.5% % a year, average yearly growth of M2, 1959Q4 to 2025Q4, the United States In the text: 105aFirst Thing, computed. As of 10 October 2026. How it is computed.
  4. 3.0% % a year, average yearly growth of real GDP, 1959Q4 to 2025Q4, the United States In the text: 106aFirst Thing, computed. As of 10 October 2026. How it is computed.
  5. 3.2% % a year, average yearly growth of the GDP price index, 1959Q4 to 2025Q4, the United States In the text: 107aFirst Thing, computed. As of 10 October 2026. How it is computed.
  6. 1.07 points of inflation per point, inflation per point of base money growth, above the line, 1950-2020, ten-year windows, a grid of economies In the text: 108aFirst Thing, computed. As of 1 October 2026. How it is computed.
  7. 0.25 points of inflation per point, inflation per point of base money growth, below the line, 1950-2020, ten-year windows, a grid of economies In the text: 109aFirst Thing, computed. As of 1 October 2026. How it is computed.
  8. 0.12 points of inflation per point, slope of inflation on base money growth, 1960-2020, calm ten-year windows, a grid of economies In the text: 110aFirst Thing, computed. As of 1 October 2026. How it is computed.
  9. 0.39 points of inflation per point, slope of inflation on broad money growth, 1960-2020, calm ten-year windows, a grid of economies In the text: 111aFirst Thing, computed. As of 1 October 2026. How it is computed.
  10. 0.27 points of inflation per point of money growth, broad money's slope less base money's, 1960-2020, calm ten-year windows, a grid of economies In the text: 112aFirst Thing, computed. As of 1 October 2026. How it is computed.