Bitcoin maximalists love talking about “money printing” and blaming central banks for the entire growth of money supply. This is a fundamental misunderstanding of how modern monetary systems actually work.
The Wrong Idea About Money Creation
A common misconception is that central banks “print” all the money in circulation. In reality, most M2 money is created when households and businesses take out loans.
Concrete Examples
Personal loan: When you buy a house with a €300,000 mortgage, the M2 money supply immediately increases by €300,000. This money didn’t exist before – the bank created it by issuing the loan.
Business loan: If a Company A takes out a $10 billion loan for a new factory, M2 increases by $10 billion. Again – this money is created from nothing.
Government debt: When the Fed buys U.S. government bonds, this is initially not M2 money, but M0 (monetary base). This money sits in the government’s account. Only when the government spends it into the economy – on salaries, infrastructure, subsidies – does it become part of M2.
Who Actually Creates M2?
- Central banks: Create the monetary base (M0) – this is “reserve” money
- Commercial banks: Create most M2 through lending
- Demand: People and businesses must want to take out loans
Key Insight
Without demand for credit, there’s no M2 growth. A central bank can create all the M0 it wants, but if nobody takes out loans, M2 doesn’t increase.
Why Bitcoin Maximalists Don’t Understand This
The “Money Printing” Myth
The Bitcoin community loves using the phrase “money printer go brrr” and attributes all inflation to central banks. This oversimplification overlooks:
- Most M2 is created by commercial banks through loans
- Central banks control the system through interest rates, not direct “printing”
- Demand for credit is a crucial factor
Example: The 2008 Recession
The Fed created massive amounts of M0 after the 2008 crisis (quantitative easing), but M2 didn’t increase explosively. Why? Because nobody wanted to take out loans – neither banks nor individuals.
Why We Need the Fractional Reserve System
If we abolished the system where banks create money through lending, we would face:
- Capital shortage for mortgages
- Limited funds for business investments
- Slowed economic growth
- Deflation – too little money in circulation
Regulation Instead of Abolition
Better than abolishing the system is proper regulation:
- Capital requirements for banks
- Oversight of lending standards
- Counter-cyclical monetary policy
How It Works in Practice
Growth scenario:
- Economy grows → people have higher incomes
- Demand for credit increases
- Banks issue more loans → M2 grows
- More money in circulation → potential inflation
- Central bank raises interest rates → loans become more expensive
- Demand for credit falls → M2 growth slows
Crisis scenario:
- Uncertainty → people don’t take loans
- M2 growth slows or even falls
- Less money in circulation → deflationary pressure
- Central bank lowers interest rates → encourages lending
The Real Problem: Government Debt Dynamics
Here’s where it gets complicated. A heavily indebted government always needs:
- Some inflation (to erode real debt value)
- Relatively low interest rates (to refinance cheaply)
But when you have both high inflation and high interest rates (like now), governments are caught in a bind. They can’t easily refinance their debt, but lowering rates might reignite inflation.
Conclusion
Understanding M2 creation is crucial for understanding modern monetary policy. Bitcoin maximalists, with their oversimplified view of “money printing,” miss the complexity of the system they’re trying to criticize.
Criticism of the fiat system is justified, but it must be based on facts, not misconceptions. Only then can we find real solutions to monetary system problems.
The fractional reserve banking system has real flaws – moral hazard, boom-bust cycles, wealth inequality – but these problems require nuanced solutions, not wholesale abandonment of a system that enables modern economic growth.
