24. How are fiat currencies created? Why is it said that it is created out of thin air?

1. The Creation of Fiat Money

Fiat money is created out of thin air, primarily when a person or entity borrows from a bank. The moment a borrower signs a Promissory Note or any form of borrowing—such as using a credit card, taking out an auto loan, or securing a mortgage—money is generated.

2. The Role of Banks in Money Creation

Contrary to popular belief, banks do not lend their own money. Instead, they instantly create the money they lend at the moment they issue a loan. Therefore, we can assert that central banks create money when debt is issued. As a result, all fiat currencies in the world today are essentially created out of thin air.

3. The Power of Our Signatures

It is our signature that creates money. Similarly, when the U.S. Treasury issues government notes and bonds, which it sells to the central bank, money is created by the Federal Reserve out of thin air. The Federal Reserve can then print and utilize this newly created cash—whether in paper or digital form—to purchase the bonds.

4. The Nature of Bank Deposits

If a bank becomes insolvent, the cash we have in the bank is technically an asset of the bank, not ours. While we may have recourse to that deposit amount, it is no longer considered our asset; it belongs to the bank. This distinction is crucial for understanding the nature of our relationship with financial institutions.