First, it's worth explaining the context: there are two main events that create it. The first is a large “budget hole” in Poland's public finances (record deficit in nominal terms and in relation to GDP), which results in an increase in borrowing needs and the need to increase debt (public debt in nominal terms and in relation to GDP is the highest in the modern history of Poland). The tight budget situation has led to demands to limit some social spending, and the concept of unconditional basic income has also been strongly criticized.
The second contribution to the discussion is the great profits banks have been making in the last few years thanks to high interest rates. Many people criticize the fact that banks significantly increased loan installments in 2021-2023 and at the same time offered low interest rates on deposits. Therefore, the question arose in public opinion – considering that banks are perceived as “intermediaries” of money between depositors and borrowers – where they get the funds for lending.
These two issues became the starting point for considerations about “creating money out of nothing”. In the discussion, taking place mainly on social media, voices can be heard that the banking sector is recording record profits in an environment in which the real economy is struggling, which raises suspicions about the systemic privilege of banks in the process of money creation.
Particular emotions aroused the conversation conducted by Robert Mazurek on RMF FM with Dr. Maciej Szlinder, president of the Polish Basic Income Network, philosopher, sociologist and economist. The conversation concerned the “experimental” unconditional basic income program in the Warmian-Masurian Voivodeship. Szlinder, who is also an activist of the Razem party, explains in an interview with Mazurek that modern money – especially in the commercial banking system and central banks – is created “out of nothing”. The journalist reacts with skepticism, irony and even arrogance. Although the conversation dates back some time, fragments of it have recently started circulating again on the X website, triggering a new wave of comments.
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The vast majority of money held by society is in the form of bank deposits, the share of cash in the so-called the M3 unit is only 17 percent. However, the origins of deposits and loans are often misunderstood. One common misconception is that banks only act as intermediaries, lending out the deposits that savers have placed with them. However, this is not a true picture of how banks function.
Do banks really create money “out of nothing”?
The document that shed more light on this issue for laypeople is the report of the Bank of England (the second oldest central bank in the world after the Swedish Riksbank) from 2014 entitled “Money creation in the modern economy”. In April 2017, the German Bundesbank also published a study on this subject. The authors of this first report state directly:
“In fact, in today's economy, commercial banks are the creators of deposit money. This article explains how – instead of banks lending deposits that are placed with them – the very act of lending creates deposits.”
This is a revolutionary statement to an uninformed person, but obvious to bankers. It means that the bank does not act as an intermediary that first collects savings from some customers in order to lend them to others. When a loan is granted, the bank does not move existing money, but creates new money in the form of an electronic record on the borrower's account. A commercial bank does not have to have PLN 100,000 in its treasury first. PLN from Mr. Nowak to lend it to Mr. Kowalski. It is an act creationis ex nihilo in the sense of the appearance of new digital records that did not exist before. Of course, this does not happen without limitations, but more on that later.
See also: ABC of banking. Where do the profits and billions in banks come from?
Money creation is what it is expansion of the bank's balance sheet total through active-passive operation. In banking accounting, every economic operation must be balanced. Granting a loan is a classic example of an operation that increases both sides of the balance sheet simultaneously.
Let's imagine that the bank grants a mortgage loan to Mr. Kowalski for PLN 500,000. zloty. In that split second, the money supply in the economy increased by this amount, and Mr. Smith has money that he can transfer to the developer. He will receive the funds to his account (perhaps in another bank), but the total amount of money in the system will remain increased. Loans are recognized as “receivables from customers” (bank assets), and funds on accounts are recognized as “amounts due to customers” (liabilities). Therefore, it is not true that “banks lend money that is not their own”. They lend money that they have created themselves (deposits), but they do it against the security of their own capital.
The fractional reserve system is the legal framework that allows this process (a bank may have more liabilities to customers than physical cash). This is the foundation on which the creation of money from nothing is based. This means that banks do not have to have 100%. coverage for all deposits (the bank assumes that not all customers will come to collect their money on the same day).
A key aspect, and often overlooked in the public debate, is the symmetrical process, i.e. the “destruction” of money. Since credit creates money, repayment of the loan “destroys” it. When Mr. Smith repays the installment, the bank reduces his loan balance (the bank's assets decrease) and at the same time his deposit decreases (the bank's liabilities decrease). It is worth noting that only the amount of capital “disappears” – the interest paid to the bank becomes its income, and after deducting costs, it becomes profit.
Regulatory and financial limits to money creation
What economists call “money out of nothing” is what economists call endogenous money supply. However, banks cannot create them forever. They encounter limits in the form of regulations and their financial situation.
Capital requirements are key in this respect. The bank must have an adequate amount of capital to cover the risk. Capital is the bank's own money, as opposed to deposits, which are customer funds. And although both categories are classified as liabilities, they differ in nature and function. Returning to capital: the bank must have enough of its own money in relation to the so-called risk-weighted assets (RWA). In simple terms, RWAs are loans, but different ones have different weights assigned, e.g. for mortgages, the bank must set aside an average of 35 percent. capital, and for consumer purposes 75 percent, and for corporate ones sometimes even over 100 percent). If a bank has too little capital in relation to RWA, it cannot grant a single zloty more credit, even if it has millions in customer deposits (this was the problem of Swiss franc banks, such as mBank or Millennium, in 2020-2025).
There is a common misconception that if a bank creates a deposit “out of thin air”, it does not risk anything of its own. The bank is risking its own capital. If the created credit does not come back, the bank loses the real wealth of its owners, even though the money itself was initially only a digital record.
Banks, wanting to benefit from the privilege of “creating money out of nothing”, must also meet liquidity requirements (Liquidity Coverage Ratio, or LCR, and NSFR, Net Stable Funding Ratio). Although creates digital money, it must take into account that the customer may want to withdraw this money at an ATM or transfer it to another bank. The point is not only to have a lot of deposits and their equivalents, but also to ensure that their structure is appropriate (e.g. cash at the National Bank of Poland, Treasury bonds that can be immediately converted into money).
There is also a reserve requirement – funds that banks must keep at the central bank. Its main goal is for the NBP to influence market interest rates, in accordance with the chosen monetary policy. It is also a tool affecting the liquidity of the banking sector, and in the past it also had prudential significance. In Poland, from autumn 2021, the required reserve rate is 3.5%, i.e. banks must keep this amount of their deposits and funds obtained from the issue of securities at the NBP. In practice: for every PLN 1,000 that the customer deposits into the account, the bank must deposit PLN 35 with the NBP. This limits the “creation multiplier” because the bank needs real money (it can borrow it on the market or obtain it from other clients) to “legalize” its created money.
Can the National Bank of Poland create new money?
Of course, central banks also create money out of thin air and their capabilities in this respect are even greater than in the case of commercial institutions. When the NBP wants to introduce new money into the system, it does not have to “have” or “borrow” it first. He simply adds the appropriate numbers to the accounts of commercial banks at the central bank.
See also: “Swedish welfare and Irish taxes”. Poland in the grip of social spending
The NBP assets side includes, for example, purchased bonds or a loan granted, and the liabilities side includes newly created money. It is worth distinguishing two matters here. Firstly, the issue of its own securities (money bills) by the NBP is usually used to fight the excess of money, not to create it (it has an anti-inflation effect). Secondly: if the government issues treasury bonds, it is not the creation of money, but its “transfer” from investors on the market to the budget (if, as part of quantitative easing, the NBP bought such bonds from them with newly created money, then it would actually be a type of money creation, this was the case during the pandemic, but in accordance with Article 220(2) of the Constitution, The NBP cannot directly finance the budget deficit and buy bonds directly from the government).
Author: Maciej Rudke, journalist of Business Insider Polska
