"The process by which banks create money is so simple that the mind is repelled"

John Kenneth Galbraith's assertion that the process by which banks create money is so simple that the mind is repelled draws attention to a fundamental but frequently misunderstood element of modern economics. Most people assume that money creation is firmly controlled by central authorities or backed by tangible assets, such as gold. In reality, the bulk of money circulating in the economy arises from routine banking operations, specifically through the issuance of loans.

When a bank grants a loan, it does not necessarily hand over existing money. Instead, it credits the borrower’s account with a deposit, effectively creating new money. These newly created deposits can then be spent, entering the broader economy and facilitating transactions. The intuitiveness of this mechanism is surprisingly at odds with the popular imagination, which often envisions money as a fixed pool or as resources transferred from saver to borrower.

Galbraith’s remark emphasizes the intellectual discomfort caused by this process, perhaps due to its elegant but counterintuitive nature. If banks possess, in essence, the ability to expand the money supply by issuing loans, it challenges traditional notions of thrift, constraint, and value. The very simplicity that underpins this mechanism—entries in accounting ledgers rather than physical currencies or complex alchemical transformations—causes skepticism, or even unease, among laypeople and experts alike. Many are drawn to suspect that such a vital function should be more complex, or somehow more tangible.

Moreover, this insight has significant implications for public policy, risk management, and economic stability. Since the banking sector controls money creation, regulation and oversight become critical to prevent excessive risk and instability. A simple process, if misunderstood or unchecked, can introduce vulnerabilities with far-reaching effects. Galbraith’s observation remains a reminder to approach economic realities with open-mindedness, and to appreciate that sometimes the most profound mechanisms are startling in their straightforwardness.