Secondly, banks must be part of your economic analysis—leaving them out is leaving out the main (but not the only) way money is created in our modern economy—and you can’t just lump them ...
Money creation is the process by which the money supply of a country, or of an economic or monetary region, is increased. In most modern economies, most of the money supply is in the form of bank deposits. Central banks monitor the amount of money in the economy by measuring the so-called monetary aggregates.
How is money created? Money is created by private banks when they hand out loans to borrowers in exchange for some collateral like a mortgage. In order to do so a bank increases its balance sheet by adding the loan as an asset and the newly created money on the banking account of the borrower as a liability.
In the US, money is created as a form of debt. Banks create loans for people and businesses, which in turn deposit that money in their bank accounts. Banks can then use those deposits to loan money to other people – the total amount of money in circulation is one measure of the Money Supply.
Bank money, or broad money (M1/M2) is the money created by private banks through the recording of loans as deposits of borrowing clients, with partial support indicated by the cash ratio. Currently, bank money is created as electronic money. In most countries, the majority of money is mostly created as M1/M2 by commercial banks making loans.
$\begingroup$ @arooo You are confusing money and wealth. The haircut doesn't add any new money. It does add wealth (in the form of GDP) as the barber creates the haircut from nothing simply by using his skill and time. Some money is created by printing new bills and coins, but most money is created by loans.
Paper money is commonly used throughout much of the world today. In the United States the official name for paper money is the Federal Reserve Note. However, they are usually just called "bills" or "dollar bills." Where is paper money made in the United States? United States paper money is made by ...
The principal way in which they are created is through commercial banks making loans: whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money. This description of how money is created differs from the story found in some economics textbooks.”(Bank of England)