Bankers “Create Money out of Thin Air,” But They Can't Simply Open a New Account and Write Checks to Buy Themselves Sports Cars or Designer Clothes

Mises writes, “[Bank fiduciary media] are entered as liabilities, and the issuing body does not regard the sum issued as an increase of its income or capital, but as an increase on the debit side of its account, which must be balanced by a corresponding increase on the credit side if the whole transaction is not to figure as a loss. This way of dealing with fiduciary media makes it necessary for the issuing body to regard them as part of its trading capital and never to spend them on consumption but always to invest them in business.” This is a crucial point that newcomers to fractional-reserve banking often miss. Even though such bankers in a sense “create money out of thin air,” they can't simply open up a new account for $100,000 and then write checks to buy themselves sports cars and designer clothes. The reason is that the merchants in the community would then have $100,000 in claims on the actual cash reserves of the bank, and ultimately the bank's vault would run out of the genuine money. What fractional bankers do instead is loan out the $100,000 to a productive business at (say) 5 percent interest. When the $105,000 is repaid in a year, the $100,000 that was initially created can be “destroyed” (through bookkeeping) and the $5,000 in interest income can be safely spent without draining the bank's cash reserves. Thus fractional-reserve bankers create money out of thin air not to directly spend it—which would be incredibly reckless and short-lived—but instead to earn interest income from it.

--Robert P. Murphy, Study Guide to the Theory of Money and Credit (Auburn, AL: Ludwig von Mises Institute, 2011), 148.