How a bank balance becomes spendable money
A deposit is not a labeled stack of bills waiting in a vault. It is a record that a bank owes you money. You can use that claim to pay someone because banks, businesses, and payment systems recognize and transfer those records under shared rules.
When you pay by card or electronic transfer, the payment system updates who is owed what. If the recipient uses a different bank, the banks also settle their obligations with one another, typically using balances held at the central bank. Those settlement balances are called reserves; they are not cash set aside for each customer.
Banks create deposits through lending
A bank loan can create money in the form of a new deposit. When a bank approves a loan, it records both an asset—the borrower’s promise to repay—and a liability: the deposit credited to the borrower’s account. No matching bundle of banknotes has to be assembled first.
That does not mean banks can create unlimited money. They must manage payments leaving the bank, meet legal and financial requirements, and judge whether borrowers are likely to repay. A loan also creates a debt for the borrower, and repayment generally reduces the deposit money created by that loan.
A claim, not an illusion
The electronic record is real in its consequences: it can pay rent, settle a bill, or be exchanged for cash, subject to the bank’s ability to honor withdrawals and transfers. Its value depends on institutions and public confidence, but it is not simply make-believe. Bank deposits are promises within a financial system, while cash is another form of money issued by the state.
The practical difference appears when many customers want cash at once: a bank cannot hand out more notes than it has available, even though customers’ account balances are much larger than the bills in its vaults.
