When a bank “uses” some portion of the money deposited in various accounts to make loans, all of the account holders are still entitled to withdraw all their money. It is supposed to be available to them at any time, and it is in fact counted as part of the total money in circulation in the economy. But the credit which is extended in making the loan adds to an account an amount equal to the amount of the loan, and the borrower is free to withdraw that money to pay expenses. This money then can circulate through the economy just like the money in the original deposits, so in the official accounting of the amount of money circulating in the economy shows that it has increased as a result of the loan. When the loan is paid off, the total amount of money in circulation has decreased by the amount of the loan. The borrower pays money to the bank which is credited against the loan balance until the loan balance is zero. That money ceases to exist since it no longer available to circulate in the economy.

The ability to create money in this way puts banks in a powerful position to influence the prosperity and direction of the economy. Some argue that the ability to create money in this way should be limited to the government that is enforcing its use as legal tender so that the influence over the economy is subject to political guidance. [see Pettifor: Just Money] Banks, however, could be made answerable to the local community rather than to profit-seeking shareholders, and there is something to be said for the creation of money at a local level if it is guided by the interests of the community it serves. Because the creation of money can potentially have an inflationary impact, banks extending credit in this way need to be coordinated and regulated by federal government, but the individual decisions about who gets how much credit could still be in the hands of local bankers.

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