Money Creation in the Modern Economy (2014) [pdf]
IMHO, the easiest way for an engineer to understand &quot;money&quot; is as a <i>network of debits and credits</i>.<p>Forget theory, ideology, and politics for a moment. Let&#x27;s focus on the mechanics of how things work.<p>When a bank lends money to a company, the bank and the company book corresponding accounting entries and money is created &quot;out of thin air.&quot;  (The bank is required to hold a minimum reserve balance, which they can borrow as needed from others in the financial system, or from a central bank).<p>When a central bank (like the Federal Reserve or the Bank of England) lends money to a bank, the central bank and the bank book corresponding accounting entries and money is created &quot;out of thin air.&quot;  Central banks literally click a button and create accounting entries.<p>When <i>you</i> borrow money from a bank, the bank books the corresponding accounting entries, and you probably won&#x27;t record anything on an accounting program -- but your bank will keep track of all balances, to the cent.<p>When a borrower cannot pay back a loan from a bank, the bank writes off the loan balance, and reduces the borrower&#x27;s liability by an equal amount.<p>The balance you have on your bank account is a liability on your bank&#x27;s accounting books.<p>The balance on your credit card is an asset on your credit card company&#x27;s accounting books.<p>When you buy something and pay with a check or a debit card, the financial system records all the necessary accounting transactions to update everyone&#x27;s debit and credit balances.<p>The dollar bills you hold in your wallet are nothing less than &#x27;certificates&#x27; indicating that the US government has a liability of the amount shown on those dollar bills, payable to the holder of those dollar bills.<p>In our modern economic system, the easiest way to understand money is as a global, mostly electronic network of accounting debits and credits, with balances varying as people conduct transactions.<p>For every debit there is an equal credit, and vice versa, so globally, total debit balances are <i>always</i> equal to total credit balances, and total debit transactions are <i>always</i> equal to total credit transactions.<p>Double-entry bookkeeping all the way down.<p>It is really quite something to behold.