Most people think the government prints all the money.

In fact, most money is created by ordinary banks.

A bank makes money when it makes a loan, and unmakes it when the loan is repaid.

The vast majority of money in the economy is bank deposits, not cash.

Those deposits are created when banks lend.

The Fed sets the price of money, the interest rate, but banks create most of the quantity.

That is why lending booms and busts move the whole economy.

It is also why bank health matters far beyond any single bank.

When a bank grants you a loan, it does not hand over someone else's savings.

It simply writes a new deposit into your account.

That deposit is brand-new money, created by a keystroke.

You spend it, and it moves to other accounts, still money.

When you repay the loan, that money is cancelled out again.

So the money supply grows with lending and shrinks when loans are repaid.

The first stress point is too much lending. It can create a boom and inflate asset prices.

The second is a sudden stop. When banks pull back, money creation reverses and the economy slows.

That is part of what deepened the 2008 crisis.

The third is trust. The system works only if people believe deposits are safe.

That belief is backed by deposit insurance and the Fed as lender of last resort.

This system has funded growth for centuries, turning savings and credit into investment.

Managed with sound banks and oversight, it is powerful and durable, which deserves credit.

What can break is confidence, when a wave of bad loans or a run makes money vanish fast.

You can watch the pulse. The Fed reports the money supply and bank lending every week.

Sharp swings in lending are the clearest sign the money machine is speeding up or stalling.

Money is mostly created by banks when they lend, and cancelled when loans are repaid.

The machine funds the whole economy, and its engine is trust in banks and their deposits.

The next test is the direction of lending. Watch bank credit growth and the money supply.