“The great enemy of the truth is very often not the lie… but the myth.”
— John F. Kennedy

❌ If the story doesn’t match the balance sheets, it isn’t money — it’s mythology.

Everyone has an opinion about money, but very few people understand the system that creates it. And when the story doesn’t match the balance sheets, myths take the place of knowledge.

 

Mythology

🔥 Myth #1: Money Is Supplied By The Central Bank

🔥 Myth #2: Banks “Lend Out” Reserves

🔥 Myth #3: The State Creates Most of the Money

🔥 Myth #4: The Central Bank “Prints Money”

 

How the Monetary System Actually Works

The modern monetary system runs on balance sheets, not on the fairy tales we teach:

1. Banks create new money when they lend
   (deposits are born at the moment credit is issued)
2. Reserves move after lending
   (they settle payments among banks, not fund loans)
3. Bank money dominates
   (for over 150 years, deposits have far exceeded government-issued cash)
4. The state creates large amounts of money when credit collapses.
   (central bank money spikes in crisis — QE is emergency money)

 

🔍 “If not the myths… then how does money really

work?”

 

🔥Exhibit 1. Credit creates a deposit — instantly

When the bank approves a loan, the deposit appears at the exact same moment.
No saver is needed. No prior money is moved.

Source: Modern Monetary System in Theory and Practice: Who Creates Money? (Table 5.1)

 

🔥 Exhibit 2. U.S. Reserves Shrink While Money Supply Surges (1980–2006)

Between 1980 and 2006, total reserve balances fell from over $30 billion to under $10 billion. Over the same period, the money supply increased “more than five-fold”. If banks needed reserves before they could lend, then lending and money growth should have collapsed along with reserves — but they didn’t.

Source: Modern Monetary System in Theory and Practice: Who Creates Money? (Table 4.2)

 

🔥 Exhibit 3. Bank Money Has Dominated for More Than 150 Years

For over a century, bank-created deposits have made up the overwhelming majority of the money supply. State-issued currency has consistently remained a small share. From 1870 to 2025 — across wars, gold-standard regimes, Bretton Woods, and major reforms — one fact never changes: the system runs on deposits, not cash.

Source: Modern Monetary System in Theory and Practice: Who Creates Money? (Graph 1.1)

 

🔥 Exhibit 4. Crisis Drives Central Bank Money Creation

In normal times, commercial banks create the vast majority of money through lending. The central bank steps in to directly support markets in crisis. It creates money when the system breaks. The Fed bought $1.7 trillion in Treasury securities during the COVID-19 crisis and created new deposits.

Source: Modern Monetary System in Theory and Practice: Who Creates Money? (Graph 6.2)

 

Why This Matters

Economics trains millions of students to analyze money. But if the foundational model is wrong, every conclusion built on it inherits the error.

Monetary theory must match the system it claims to describe— not the stories we inherited.:

• Who creates money
• When it is created
• Where it appears on balance sheets
• Why crises force the state to step in

Updating this foundation is not a choice.
It is a responsibility to students, researchers, and policymakers.

The myths must go.
The accounting must lead.

 

A Framework Built on How Money Actually Works

That is why I wrote this book:

📘 Modern Monetary System in Theory and Practice: Who Creates Money?
By Engin Yılmaz

A balance-sheet–grounded framework for understanding money as it actually works today.

It rebuilds monetary understanding from the balance sheet up:

• Credit creation
• Payment and reserve operations
• Money in crisis

If you study or work with money, you need a framework grounded in how money actually works.

If the model cannot explain creation, it cannot explain the economy.

Engin Yılmaz