Connecting the dots
Has the amount of money in the world always been what it is today, or has it grown? And if it’s grown, where did the extra come from?
It’s true that people get rich by claiming what is already there in earth for e.g. Gold, Oil, minerals, etc. Earth itself can’t get richer because earth’s mass is not changing. Yet global wealth keeps climbing. Global M2, a standard measure of money in circulation, roughly cash, checking, and savings, now sits somewhere near $100–120 trillion. Going back to 1980, it was a small fraction of that. So if the earth isn’t getting bigger, and gold isn’t multiplying, where does all the extra money come from?
That question is part of why markets and economies fascinate me. Nothing about them is straightforward. An economy behaves less like an equation and more like an emergent system, the kind you see in a beehive, an ant colony, or the weather. In each case, complex, hard-to-predict behavior arises from huge numbers of small, independent units interacting. A market is exactly this: millions of individual decisions, driven not just by math but by expectation, excitement, fear, and hope, aggregating into something that looks, from a distance, almost alive. You cannot study an economy without studying human behavior, because the economy simply is human behavior, added up.
How new money actually enters the economy
Most people picture money as something that already exists, sitting in vaults or bank accounts, just moving from person to person. That’s not quite how modern banking works.
A large share of the money circulating today was created when a bank made a loan, though not out of thin air. Imagine a small business owner wants to open a bakery. She needs $100,000 for equipment, rent, and staff, and her bank approves the loan. The bank doesn’t typically pull that $100,000 out of someone else’s savings account. Instead, it creates a new deposit directly in her account. Banks can’t do this without limit, they’re constrained by capital requirements, liquidity rules, regulation, and their own judgment about the risk, but within those limits, the act of lending itself is what creates the money.
Her account shows +$100,000. The bank’s own books simultaneously record a new asset (the loan she now owes) and a new liability (the deposit she now holds). That deposit is new money. Where did it come from? The transaction itself. The bank is taking on risk by extending credit, which expands her purchasing power, and it’s compensated for that risk through interest.
Look closely, and you’ll notice something: the bakery doesn’t just move money around, it adds real value to the economy, fresh bread, a place to sit, jobs. As that new deposit gets spent, on flour, on wages, on rent, it becomes income for other people, who use it to pay down their own debts or spend it further. Both the money in circulation and the goods and services available in the economy grew together. That’s what a healthy expansion actually looks like.
Is the economy permanently richer because of it?
Not exactly. That $100,000 is a financial claim, not $100,000 of newly created physical wealth. The bakery now owes the bank $100,000 plus interest. Say the bakery succeeds: over several years, customers buy $150,000 worth of bread, and the bakery uses part of that revenue to repay the loan. As the principal gets repaid, the deposit that was created alongside it is generally destroyed again. Money is created when a loan is made, and undone, roughly, when it’s repaid.
Money itself isn’t wealth. The bakery’s ability to bake bread is wealth. Money is closer to a record of who has a claim on that wealth, the same idea explored in the earlier piece on what money actually is.
What happens when this goes out of balance
If businesses and households keep borrowing, and the economy is producing correspondingly more goods and services to match, money and production grow together, and that’s healthy. Problems start when the two fall out of sync.
If money and credit expand faster than the economy’s ability to produce, you get too much money chasing too few goods: inflation. Venezuela in 2017–18 is a real, sobering example, the government expanded its money supply sharply through its central bank to offset collapsing oil revenue and falling production, and inflation spiraled as a result. A country can’t make itself richer simply by printing more of its own currency; without new goods and services to back it, it just erodes the value of what’s already circulating.
The reverse can also happen, banks lending less, borrowers repaying faster than new loans are made, causing the money supply to slow or shrink. This produces deflation, a genuinely rare state for modern economies, though not nonexistent, Japan spent much of the 1990s through the 2010s wrestling with exactly this. Today, the Federal Reserve’s actual, explicitly stated target is 2% inflation, a target it’s held publicly since 2012, aiming to stay close to that number rather than simply avoiding some higher ceiling.
A note on collateral
Collateral, a house, equipment, some other asset, is often misunderstood. The bank isn’t saying “you have $100,000 of assets, so here’s $100,000 in cash.” People who need a loan usually need more than what they currently hold, so collateral is rarely equal in value to the loan itself. It’s security, a fallback the bank can seize and sell if the borrower defaults, not the actual mechanism by which the money is created. The deposit is created by the act of lending itself.
The bigger picture
Think of the banking system as a bridge between future production and present spending. A business might have a good idea today without the capital to act on it yet. A bank can finance that idea now, based on the expectation of income later. The new money lets the business hire people and buy materials immediately; if it succeeds, the goods and services it produces generate the income to repay the loan.
So modern money creation isn’t “banks printing money out of thin air.” It’s closer to: banks create deposits when they extend credit, letting purchasing power enter the economy today in exchange for a promise of future repayment, one that, on average, returns more value than was extended.
The real question isn’t how much money exists, it’s what the economy can actually produce: goods, services, technology, infrastructure, knowledge, human effort, etc., because the value of money itself can change relative to its own supply and the supply of goods and services. Money is the accounting system laid on top of that, the unit that records a claim to it.
So the final answer is yes, money increases in an economy, but in healthy ones, it’s proportionate to the value of goods and services produced by that society in the same period of time.
More about who's writing this is on the About page. If this got you thinking, or you'd push back on any of it, I'd genuinely love to hear it: sharma.rujjwal [at] gmail [dot] com.
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