Banks create money by lending it to people.
This is a form of fractional reserve banking, which was made legal in the United States by the Federal Reserve Act of 1913.
The act allowed banks to take in deposits and use them as reserves for loans they make.
While this process may seem like magic, there are actually two ways that banks create money when they lend it out:
1) When someone takes out a loan from a bank, new money is created because the borrower must pay back more than what he or she originally took out (plus interest).
For example: if you have $10 and borrow $5 from your bank at an annual percentage rate of 5%, then one year later you will owe $6.25 in principal and interest, for a total of $16.25 ($15 plus the bank’s service charge).
And For example: if you have $20 and borrow $14 from your bank at an annual percentage rate of 12%.
Then one year later you will owe $36.28 in principal and interest, for a total of $56.28 ($55 plus the bank’s service charge).
This process is known as compound interest because it increases exponentially over time; In other words.
This means that while banks create money when they lend it out to people who take out loans, there never was any new money created .
Just more debt owed by those same individuals (or governments) with their accumulated wealth being passed on through.