You cannot create money (in our current fiat monetary system) without simultaneously creating the same amount of debt.

That is a hard thing to understand. Yet it is the key to understanding our monetary system.

Most people immediately say “Well, the central bank just prints the money – where is the debt?”

Yes, central banks print money. But as long as it hasn’t yet left the central bank, nobody can use that money. It’s not part of any monetary base. Unless you manage to steal it, you cannot acquire anything with that money. For all means and purposes, it doesn’t exist yet.

Coins and bills become money once they leave the central bank. How does that happen?

When a commercial bank asks for a delivery of cash (usually to replenish ATM’s – automated teller machines), the central bank does not hand it out for free. It debits the account the commercial bank holds at the central bank. The balance of that account decreases. What goes up is the amount of currency in circulation. And that shows up in the central bank’s liabilities.

When you hold that cash in your hand, you are actually holding a piece of debt of the central bank. When you bring that cash and deposit into your bank account, your account now has a positive balance, which is part of the bank’s liabilities. Again, your savings are the bank’s debt.

You cannot create money (in our current fiat monetary system) without simultaneously creating the same amount of debt.

The vast majority of our monetary system is non-cash. And the vast majority of money created does not come from the central bank.

To see how much money the central bank created, you just need to look at its liabilities. Here is the Fed’s (Federal Reserve Bank System) balance sheet as of June 30, 2021:

A – Federal Reserve Notes outstanding: these are dollar bills in circulation ($2.1 trillion)

B – Depository institutions: These are commercial banks having a positive account balance with the Fed ($3.5 trillion)

C – Treasury General Account (TGA): This is the government’s money (usually proceeds from sales of government bonds, $851 billion)

D – Total liabilities: This is the amount of money the Fed created ($8 trillion)

E – Paid-in capital: This, together with surplus, is the central bank’s equity. At roughly $40 billion, it amounts to less than 0.5% of the bank’s balance sheet. In other words, the Fed is levered 200:1.

However, liabilities of all sectors (households, corporations, government) amounted to $85 trillion:

This means that $77 trillion, or more than 90% of domestic US money creation, occurred outside of the central bank! And we haven’t even touched an entire system of dollars (“Eurodollars”) created outside of the US.

In the following table I tried to classify different sources of ‘money’. Note how each manifestation is someone’s liability. I also included gold and Bitcoin. While it is debatable if they can be called money (gold is cumbersome as ‘medium of exchange’ while Bitcoin’s volatility put a question mark behind its use as ‘store of value’), both are clearly nobody else’s liability:

Conclusion: In our current monetary system, your savings are always someone else’s liabilities. Money, as we know it, can only exist as matter and anti-matter. Savings must equal liabilities. The implications of those facts will be topic for a different article.