Money Supply and Banks The Supply of Money and the Great Banking Confidence Trick. Money is what we use to buy things and its commonest form is as bank accounts, particularly current accounts, in the commercial banks. Cash and credit money together are often given the name M1.
Banks create money.
Commercial banks and some other institutions may, by law, create money from nothing. This is done by setting up a current account deposit for an individual or business which is balanced by a loan, or overdraft, owed by that customer. The bank's books balance and the customer can set about spending the new money from his or her current account. It is important to realise that this means that a bank can lend money which has not been previously deposited. As payment the builder is given a current account deposit in the bank's books.