---
id: "prereq-fiat-money-creation"
type: "prereq"
source_timestamps: ["00:22:35"]
tags: ["macroeconomics", "banking"]
related: ["concept-debt-based-money", "quote-money-supply-debt"]
reason: "Understanding why continuous inflation is mathematically guaranteed requires knowing how debt creates money."
sources: ["markmoss"]
sourceVaultSlug: "mark-moss-debasement-trade-bitcoin-2026Jun25"
originDay: 5
---
# Mechanics of Fiat Money Creation

## Why You Need This

To fully grasp Moss's argument for the [[concept-debasement-trade]], one must understand that modern fiat currency is created by **commercial banks when they issue loans** — not just printed by a central bank. This debt-based system requires perpetual expansion.

## Core Mechanics

1. **Credit creation, not gold conversion.** When a bank issues a loan, it simultaneously creates a deposit equal to the loan amount. This expands the broad money supply (M1/M2) without anyone depositing pre-existing money.
2. **Central bank base money vs. commercial broad money.** The central bank creates reserves (base money) via asset purchases (QE). Commercial banks create the bulk of the money supply through lending.
3. **Interest creates a structural gap.** Loans must be repaid with interest, but interest is not created at the time the loan is originated — creating a permanent shortfall that requires more borrowing to close.

See [[concept-debt-based-money]] for the full framework and [[quote-money-supply-debt]] for Moss's pithy summary.

## Mainstream Sourcing

This description is consistent with standard descriptions of fractional reserve and credit money creation found in macro textbooks and central bank education materials (e.g., Bank of England's *Money Creation in the Modern Economy*, 2014).