At the very basis of this money creation process is an economic agent (household, company) who wishes to acquire an asset or finance an additional expense without having the corresponding financial resources.
In the absence of credit, this agent would not be able to carry out his project immediately and would have to wait until he had the necessary resources to do so, which in some cases could take years or even never happen (e.g. buying a house for an individual).
However, through the credit they provide to their customers, commercial banks will enable many of these projects to materialise. Commercial banks play a role as financial service providers for individuals and companies, which places them at the heart of the financing of the economy and makes them a major player in it.
Two ways of granting credit
There are, however, two ways in which commercial banks provide credit to their customers.
Using existing deposits
The first is to use their customers' deposits that are not being used. In doing so, banks transfer resources from agents with savings capacity to agents with financing needs.
Since their customers' deposits are generally liquid in the short term and the loans they grant are longer term, banks practice the transformation of pre-existing liquid savings into financing more adapted to the needs of the economy. This process is summarised by the adage "deposits make loans". However, this is a simple transfer from one category of agents to another, and there is therefore no money creation.
Creating money
The second way for commercial banks to grant credit to their customers is to create money, i.e. to make a loan without having the corresponding amounts in resources.
To do this, commercial banks will credit their customer's current account with the amount of the loan granted. By a simple writing game, they will thus create money. In this case, "loans make deposits" since the amount of the loan granted is added to the current account of the commercial bank's customer.
It is thanks to this process that the stock of money in circulation grows in line with the money needs of the economic system. Only commercial banks have this power of money creation.