Decoder Ring | How to Make Dollars Make Sense

Summary

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Podcast Summary: Decoder Ring | How to Make Dollars Make Sense

Podcast: Slow Burn (Slate Podcasts)
Date: April 22, 2026
Host: Willa Paskin
Guests: Brendan Greeley (finance reporter, author), Mark Blythe (political economist)

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Episode Overview

This episode of Decoder Ring dives into the strange, counterintuitive, and surprisingly global history of the dollar and unpacks two basic but profound questions:

• Why is our currency called the "dollar"?
• Where does money really come from?

Host Willa Paskin and guest Brendan Greeley—finance journalist and author—debunk common myths about the origins and function of money. Their conversation, supplemented by political economist Mark Blythe, explores why the dollar is named as it is, how its dominance was a historical accident, and how modern money is largely created by private banks, not governments.

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Key Discussion Points and Insights

I. The Real Origin of the Dollar

(Begins ~02:22)

• Prompted by SNL Sketch:
  The conversation begins with Brendan recounting a Saturday Night Live skit where “George Washington” is asked why America's currency is called the dollar; the joke suggests nobody knows.

  “And one of the cast members goes, General, why will it be called the dollar? And he says, nobody knows.” — Brendan Greeley (03:41)

• Brendan Actually Knows:
  In fact, we do know, and Brendan Greeley has spent years uncovering that story for his forthcoming book.

A. The Silver Mines of Bohemia (1512)

(~09:28–10:15)

• The dollar's genealogy begins in Joachimsthal, Bohemia (now Czechia), where vast silver deposits were discovered. Count Stefan Schlick, a hucksterish nobleman, starts minting high-quality silver coins—Joachimsthalers.

• These coins are consistent, reliable, and trusted, making them widely desirable beyond local borders.

  “The most important quality a money can have is that it be useful. The second most important quality...is that there be a lot of it.” — Brendan Greeley (13:48)

B. How the “Thaler” Became the “Dollar”

(~14:01–14:15)

• Joachimsthaler is shortened to “thaler,” which English speakers pronounced as “dollar.” Other states and empires copied these coins, creating a vast “dollar system” across Europe and beyond.

• The widespread adoption wasn’t by government decree, but because these coins became so functional and prevalent in trade.

C. The Spanish “Pieces of Eight” and Global Spread

(15:49–17:05)

• Spain, colonizing Latin America, finds massive silver deposits and floods the world with its own version, the “piece of eight” or “real de ocho”—essentially a dollar-sized coin.

• This coin circulates globally, including in British North America before the Revolution:

  “The dollar was massively important within the colonies well before the revolution.” — Brendan Greeley (17:39)

D. America Didn’t Invent the Dollar

(~19:14–19:34)

• At independence, American founders adopted the widely familiar Spanish dollar with a German name—rather than creating something new.

  “Hamilton and Jefferson decided to base the new monetary system of a new country on a Spanish coin with a German name. … Our adoption of the dollar was not an act of sovereignty. It was an act of acquiescence.” — Brendan Greeley (19:14)

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II. Where Does Money Come From?

(Begins ~20:21; main segment from ~22:00)

• Willa’s Assumptions Challenged:
  Most people (including Willa) assume the US Mint or the Federal Reserve creates our money.
  In reality, coins form only a sliver of the money supply.

• The Federal Reserve Myth:
  The Fed is widely believed to “create money out of thin air,” which isn’t quite accurate.

  “When we learn that the Federal Reserve is the origin of money, we have absolutely no way to explain how money worked in the 19th century because there was no Federal Reserve, it didn’t exist.” — Brendan Greeley (24:07)

A. The Econ 101 Story: Fractional Reserve Banking

(Begins ~26:24)

• Mark Blythe explains the common model:
  Banks take deposits, keep a small reserve, and lend out the rest—thus “multiplying” money.

  • “The money’s not here”—It's a Wonderful Life model (27:24)
  • This model positions banks as intermediaries or amplifiers.

B. The Reality: Endogenous Money

(Begins ~30:35)

• In practice, banks create money by making loans.

  • When you get a loan, the bank simply credits your account—creating new “deposit money” on the spot.
  • 97% of modern money is created this way (“fountain pen money”).

  “They just immediately digitally credit $12,000 to your account...That’s the creation of money. They’ve just created $12,000 like that, nothing.” — Mark Blythe (31:45)

• It’s not magic, just accounting—tied to banks evaluating borrowers’ creditworthiness.

  “It’s not magic, it’s finance. We can have a normal layperson conversation about why this stuff has meaning.” — Brendan Greeley (34:29)

C. Implications: Power and Responsibility of Banks

• The real power to create money means banks aren’t just intermediaries; they’re granted immense influence and require strong regulation.

  “If we don’t understand that banks make the money, then we don’t feel the same compulsion to make sure that they make it responsibly.” — Brendan Greeley (35:58)

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Notable Quotes & Memorable Moments

• “The most important quality a money can have is that it be useful. The second most important quality...is that there be a lot of it.”
  — Brendan Greeley, 13:48

• “Our adoption of the dollar was not an act of sovereignty. It was an act of acquiescence.”
  — Brendan Greeley, 19:14

• “The bank just makes the money up.”
  — Brendan Greeley, 20:34

• “They actually just make it up. They just immediately digitally credit $12,000 to your account.… That’s the creation of money. They’ve just created $12,000 like that, nothing.”
  — Mark Blythe, 31:45

• “It’s not magic, it’s finance.… we can have a normal layperson conversation about why this stuff has meaning.”
  — Brendan Greeley, 34:29

• “They’re insanely powerful. We’ve given them this power. And in return, like, we need banking regulation to make sure that they don’t periodically blow up.”
  — Brendan Greeley, 35:58

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Timestamps for Key Segments

• 02:22 — Introduction of SNL sketch; initial curiosity about dollar’s etymology.
• 09:28 — The historical origin of the dollar in Bohemia.
• 14:01 — Etymological transition to “dollar”; global coin copying.
• 15:49 — Spanish Empire, silver flood, “pieces of eight.”
• 17:39 — The dollar in pre-Revolutionary America.
• 19:14 — U.S. founders adopt the dollar—didn’t invent it.
• 22:00 — Who really creates all our money? Misconceptions about the Mint.
• 24:07 — The Federal Reserve as a latecomer; real source of money is commercial banks.
• 26:24 — Econ 101: Fractional reserve banking explained (It’s a Wonderful Life reference).
• 30:35 — The endogenous money theory: banks create money outright.
• 31:45 — Concrete example of how banks “make up” money during loans.
• 34:29 — The philosophical and practical meaning of money and banking.
• 35:58 — The need for bank regulation, given their money-creating power.

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Tone & Style

The episode is engaging, thoughtful, and occasionally playful—especially as it unpacks complex economic concepts with memorable pop culture references (SNL, It’s a Wonderful Life). Willa confesses her own misconceptions, inviting the listener into the process of discovery. Both guests encourage demystifying money by looking at its history, functionality, and institutions with clear-eyed curiosity.

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Summary for New Listeners

If money feels natural and inevitable, this episode is a powerful reminder: what we call “the dollar” was never “invented” by Alexander Hamilton, but emerged from a long line of pragmatic, sometimes accidental, adaptations of what worked in commerce. And the dollars in our accounts? Far more of them are conjured by banks deciding to issue new loans than are printed or minted by governments. Understand these origins, and the strange, fascinating realities of money start to make a lot more sense.

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Transcript

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[Willa Paskin]

Greeley saw something on television that couldn't have been more up his alley.

[Brendan Greeley]

Have you seen this skit? Nate Brazzi was on Saturday Night Live and he's playing George Washington. General Washington.

[Mark Blythe]

We apologize.

[Brendan Greeley]

No need. I am fearful as well.

[Willa Paskin]

Bargazi as George Washington is crossing the Delaware like in the famous painting and trying to inspire his men.

[Brendan Greeley]

But we will live through the battle ahead because we fight to to control our own destiny to create our own nation and to do our own thing with the English language.

[Willa Paskin]

He then details the linguistic oddities his soldiers are fighting for, like the freedom to call cows and pigs beef and pork when they're dead. But for chickens to always just be chicken. And the privilege of having two ways to spell.

[Brendan Greeley]

Jeff, what are the two ways to spell Je? The short way with a J and the stupid way with a G. And so one of those lines is, he's like, and we will have our own currency, and it will be called the dollar. The dollar, sir? Yeah. And one of the cast members goes, general, why will it be called the dollar? And he says, nobody knows.

[Willa Paskin]

And with that, Brendan's phone lit up, because it isn't true that nobody knows why it's called the dollar.

[Brendan Greeley]

I got texts from people. They're like, wa. I know a guy who knows.

[Willa Paskin]

Brennan's been a finance reporter for 20 years. He covered the Federal Reserve for Bloomberg and the Financial Times, where he still writes a column. And a couple years ago, an editor suggested to him that there might be a juicy book in a biography of the dollar.

[Brendan Greeley]

Literally, someone said, do you want to write a book? And I was like, sure do. I'm definitely going to write a book. I can figure this out. And then I started to figure it out, and I realized how much I didn't know and how much I had to learn.

[Willa Paskin]

All that learning ultimately went into his forthcoming book, the Almighty Dollar 500 Years of the World's Most Powerful Money. In the course of writing it, he actually enrolled in a PhD program in economic history at Princeton. And he discovered that the history of the dollar was so much stranger than he'd realized, so much crazier and more complicated than he known when he was just a finance journalist.

[Brendan Greeley]

Now, like, when I pick up a dollar bill, an actual physical dollar bill, I actually have these thoughts. I'm like, God, this is so weird.

[Willa Paskin]

You weirded the dollar for yourself.

[Brendan Greeley]

Basically, I did. I weirded the dollar for myself, and now I am weirding the dollar for everybody else. You're welcome.

[Willa Paskin]

This is Decoder Ring. I'm Willa Paskin. There is nothing more common than money. It's everywhere. It influences just about everything. It's as close to being the air we breathe as anything that's not actually air. And yet this can obscure all the complex assumptions baked into it, all the historical forces that make it what it is and make it behave the way that it does. It can obscure just how weird it is. But in this episode, we're going to try and show you by drawing your attention to some strange things we don't really think about, even though it feels like we're thinking about money all the time. So today on Decoder Ring, two simple sounding questions. Why is our money called the dollar? And where are those dollars really coming from? We all belong outside. We're drawn to nature. Whether it's the recorded sounds of the ocean we doze off to or the succulents that adorn our homes, nature makes all of our lives, well, better. Despite all this, we often go about our busy lives removed from it. But the outdoors is closer than we realize. With Alltrails, you can discover trails nearby and explore confidently with offline maps and on trail navigation. Download the free app today and make the most of your summer with Alltrails.

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[Willa Paskin]

So contra Saturday Night Live, there are people who know why the dollar is called the dollar, and Brendan Greeley is one of them. But like I said, he didn't learn it. All the years he spent as a reporter talking to economists.

[Brendan Greeley]

When I tried to do a history of the dollar, I found that the way economists thought about money wasn't useful to me. It wasn't helpful. Listen, not a knock on economy. I mean, it is a knock on economists, but like every science, relies on simplifications, on models, on assumptions, and what I found was, for me, the assumptions that are inherent in economics didn't explain how money works.

[Willa Paskin]

There are many such assumptions, but let's start with one about how a country first creates its currency. The common idea is they just make it up.

[Brendan Greeley]

So if you were to declare the free state of Pascalandia tomorrow, our assumption would be, well, in Pascan Landia. We pay each other in willows. That's the currency. I gave it a name. This is how it's going to work.

[Willa Paskin]

If you're being highfalutin, you could call this idea monetary sovereignty, but the concept is not all that different from how it's portrayed in the Nate Bargazi sketch about George Washington. In 1776, we declared independence, created a new country, and our new country needed a new currency. And so we made the dollar. That's monetary sovereignty. Political independence equals monetary independence.

[Brendan Greeley]

America is an independent country. It declared its political sovereignty. In doing so, it automatically acquired monetary sovereignty. Alexander Hamilton was amazing. He came up with all sorts of amazing new laws and we had the dollar and that's where it went from there.

[Willa Paskin]

That's definitely the story. I'm like, yeah, that's what I think happened. Is that what you thought happened?

[Brendan Greeley]

Yes, of course that's what I thought happened. That is not what happened.

[Willa Paskin]

So what did happen then?

[Brendan Greeley]

Okay, so we have correspondence, you know, from Jefferson, from Hamilton, talking about a monetary system. And Jefferson at one point says, it makes sense to use the money that is already the most familiar. The dollar wasn't an invention. It was not a creation of the United States. They were adopting something that already existed.

[Willa Paskin]

So the dollar didn't start with America. Instead, the dollar began a couple hundred years before in the Kingdom of Bohemia, the western part of what is now Czechia, when in 1512, some people discovered silver in a valley called Joachimstall. The lord at Joachimstall, Count Stefan Schlick, wanted to keep as much of that silver to himself as he could, but he needed help getting it out of the ground.

[Brendan Greeley]

So he went across the border to Saxony, found mining investors and mining experts, and brought them over, dressed them up like a hunting party so that nobody would know they were actually silver prospecting. Went up into the valley, took a look at it, and they found the silver and immediately started digging.

[Willa Paskin]

The silver mine at Yakim Stahl was extremely productive. A lot of silver in there. But Count Stefan Schlick was not an entirely above board character.

[Brendan Greeley]

He was a huckster, he was a chancer. Schlick didn't actually have title to the mine.

[Willa Paskin]

Essentially, he was digging up tons of precious metal that wasn't necessarily his and smuggling it out of the country to pay his investors and to pay off his debts without paying taxes to the King of Bohemia.

[Brendan Greeley]

Just breathtakingly illegal. So what happens is eventually all the most important and powerful people in Bohemia figure out what's going on, and they decide, okay, we got to lock this down. So they come up with a deal where they say, okay, you can keep doing this, but King's gotta get it cut.

[Willa Paskin]

No more hustling unknown quantities of metals straight out of the ground and over the border. To keep him honest, Schlick would have to turn all of the silver into coins minted right there at Jochemstall. Uniform, pure silver, controllable coins.

[Brendan Greeley]

It was important to make them consistently sized, high quality coins because that was literally easier to divide up the shares.

[Willa Paskin]

Some of those coins would go to pay the king and the rest could be sent back to investors for financing the mine.

[Brendan Greeley]

Okay, everybody who's an investor in the mine gets 10 big coins. That's your dividend.

[Willa Paskin]

What size is it? Like, what size is it?

[Brendan Greeley]

Oh, it's like a silver dollar.

[Willa Paskin]

So, like, still small silver.

[Brendan Greeley]

I mean, yeah, but for the time, incredibly valuable.

[Willa Paskin]

These physically small but incredibly valuable silver coins from Jochemstall, about twice the size of a quarter, were first minted in 1520, and they became known as Jochen stollers. Yakumstollars were not intended to be the new local currency, something regular people would use to buy loaves of bread. They were intended for people like investors and noblemen and merchants. But they were unusually reliable and thus unusually desirable. So desirable, the miners who were actually digging the silver out of the ground at Yakim Stahl to make the coins wanted them too.

[Brendan Greeley]

The miners are actually getting paid in low quality, impure silver. And eventually they revolt three times, literally. They, they strike and then they revolt. They, like sack the town. And in their demands, they say, we want to get paid in the same good silver that's coming out of the ground here in the same good Jocham Stall coin that the investors are getting.

[Willa Paskin]

By the end of the 1520s, Joachimsthalers were spreading over much of northern Europe.

[Brendan Greeley]

What you have is a massive flood of big, pure, consistently sized coins. It's moving up through silver markets and Leipzig, it's moving up and out through the Baltic. It becomes really useful for paying tolls in Denmark and in Sweden. You start to see it be super useful in Russia because it was high quality and you could just count it instead of weighing it. And so they began to adopt it as a unit of measure.

[Willa Paskin]

So what you're saying to me, or what I'm hearing, tell me, is that sort of like the innovation of the Occam Staller is basically that it is consistent and convenient. It's a consistent size, it's a consistent weight, like it is what it says it is everybody who touches it, like, oh, whether you're in the Baltics, whether you're in Russia, you're like, this is always going to be high quality silver of this size and this value.

[Brendan Greeley]

And it's the volume, it's the consistency and the volume together. The most important quality a money can have is that it be useful. The second most important quality that money can have is that there be a lot of it.

[Willa Paskin]

As the Jakam Staller spread around Europe, its name got shortened to simply the toller, or in English, the dollar. And pretty soon other countries and city states began to mint their own versions of it.

[Brendan Greeley]

People start to copy this coin and they start to refer to their copies as their own dollars. You've got principalities all over the Baltic and the Low Countries going, oh, hey, we've got it. We've got one of those too. They're just copies. Nobody's telling them they can. They just do it. And I think that's a thing often that happens in money. We think of money as a command and control thing, where the government says, you got to use this money, and then you do. But far more often what's going on is people are making their own money in ways that are useful to them. That's far more common than this story that we have of new country, new money.

[Willa Paskin]

By the mid-1500s, the Jakam's dollar had become the most important coin in the world, spreading far beyond Europe, all the way to Asia. And that didn't happen because a country decreed it as their new currency. It happened by accident because a minor bohemian noble got in trouble with the king and was forced to start making very consistent coins, which people all over the world found incredibly useful. So useful that countries started to adopt and adapt them, even powerful ones like the Spanish Empire. And it's thanks to the Spanish empire, the dollar would spread even further. In the 1540s, Spain was in the midst of brutally colonizing vast regions of South America. And while doing so, it found enormous silver deposits, particularly in what is now Bolivia. These mines swiftly eclipsed European silver output, turning the New World into the hub of global silver production.

[Brendan Greeley]

As Spain is becoming an empire, it figures out this sort of brutal system of exploitation to get a lot of silver out of the ground very quickly. At the mine in Bolivia called Potosi, what that does is that creates a new flood of silver. So it wasn't just that Spain found silver, it's that they figured out inside of an empire how to produce a lot of silver very quickly.

[Willa Paskin]

And if the emperor of Spain wanted this silver to seamlessly become part of global trade, there was an obvious thing to do with it.

[Brendan Greeley]

When he sold his silver, he had to sell it in the form of a jachamstaler. So he takes a pre existing Iberian coin called a real, and then it turns out that if you multiply the real times eight, you get something that looks a lot like a joachimsthaler and weighs almost the exact same amount. So they called this coin the piece of eight, the real estate ocho. But any English speaker would have immediately recognized this coin as a dollar.

[Willa Paskin]

What you are saying is the emperor of Spain taps into a huge quantity of new silver. It is on the opposite side of the world of Bohemia. And instead of just being like, oh, I have this whole new silver, I'm going to make a whole new system. The tolerance already so powerful, he's like, I have to just take this gushing bunch of silver that I've found somewhere halfway across the world and make it look exactly the same.

[Brendan Greeley]

That's exactly right.

[Willa Paskin]

Okay, just checking. The Spanish empire is soon circulating Spanish silver dollars, or reales de Ocho, on an even more unprecedented scale than ever before. These coins are truly everywhere.

[Brendan Greeley]

There's this huge global system of silver. It's leaving Potosi, it's leaving Zacatecas in Mexico, it's going through Europe, it's going at this point on galleon straight to Manila and to China.

[Willa Paskin]

And some of it was entering the economy of the 13 British colonies in America way before Alexander Hamilton was even born.

[Brendan Greeley]

The dollar was massively important within the colonies well before the revolution.

[Willa Paskin]

And that's because the colonists needed those dollars. Great Britain declined to enforce its own system of pounds, shillings and pence in its American colonies or even provide the colonists with enough coins to conduct their daily business. So each colony was forced to cobble together its own monetary system out of basically IOUs colony backed currencies like Pennsylvania shillings and whatever foreign coins they could get their hands on. And the coins that were most useful and most likely to show up in North America were Spanish dollars.

[Brendan Greeley]

If you sold anything to the Caribbean, you could get dollars because they were circulating up from the Spanish territories in Latin America. And in fact the colonies are competing to bring in dollars. They're desperate for this silver coin and they're fighting each other to attract it. So if you've got dollars, if you are literally a pirate of the Caribbean and you need to sell them somewhere in the colonies, you have Pennsylvania and New Jersey and New York actively competing to Give you more domestic purchasing power in their own colonies for your silver dollar.

[Willa Paskin]

So this is the status quo when the American revolution finally happens. And then America throws off the shackles of the British Empire and and its monetary system. But instead of our founding fathers being like, hey, let's start a brand new money that's just all ours, they're like, everybody knows the dollar. Everybody wants the dollar. Let's just use that.

[Brendan Greeley]

Hamilton and Jefferson decided to base the new monetary system of a new country on a Spanish coin with a German name. Again, we joined an existing global dollar system. We did not create the the dollar system. Our adoption of the dollar was not an act of sovereignty. It was an act of acquiescence.

[Willa Paskin]

The dollar pre existed us. We didn't create it. We just hopped on the dollar train because it was working so well. And it wasn't just us. The Canadian dollar, the Hong Kong dollar, those aren't a reference to us. They're a reference to the Jocham dollar. Okay, so I found this history of the dollar, like, revelatory. Like, I had never thought about it, to be honest. If I had thought about it, I would have been like, yeah, we made up the dollar when we became a country. Like, I definitely would have thought something like that. But I will tell you the truth, which is in your book. It is the thing that fried my noodle second most. And there's a thing that really did me in first most. Okay, that's a way to say it.

[Brendan Greeley]

Okay.

[Willa Paskin]

And it is. It is. So it was like, where's the dollar from? It's where does money come from? Which seems like it should be a simple question, but really, did me and Brendan. Where does money come from?

[Brendan Greeley]

The bank just makes the money up.

[Willa Paskin]

How it works. After the break.

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[Willa Paskin]

So where do you think money comes from? Like, who is creating all the dollars that we are exchanging and borrowing and earning and spending and investing every single day? I want you to take a second, especially if you're not a finance person, to see what you come up with. To be honest, before working on this episode, I had never thought to even wonder about this question. All I knew about where money comes from is where it doesn't come from. It doesn't grow on trees. When I did finally start thinking about this question, though, while working on this piece, my initial answer was something like the Mint. Brendan Greeley, veteran finance reporter and author of A New History of the Dollar, got a good chuckle out of that. Because while yes, the US Mint does manufacture a bunch of coins, they represent only a fraction of the trillions of dollars out there being transacted every day.

[Brendan Greeley]

The slice of the pie that cash takes up is disappearing. You know, we just use physical cash less and less.

[Willa Paskin]

So if it's not the Mint, then who? If you know anything about money at all, your answer is likely to have something to do with another government. The Federal Reserve.

[Commercial Advertiser]

The Federal Reserve or the Fed, is the central bank of the United States. As the central bank, it determines our nation's monetary policy.

[Willa Paskin]

The Fed exerts an extraordinary amount of control and influence over the American economy, and everyone pays attention when it changes interest rates. Investors are anxiously awaiting to see if the Federal Reserve will issue another rate cut this afternoon, a move that could affect everything from mortgage rates to the prices of stocks and bonds. And in an introductory econ class, to say nothing of the news, you will be told this important and powerful entity is the one ultimately in charge of creating our dollars.

[Brendan Greeley]

It's almost like alchemy. You can create money out of thin air if you're at the central bank.

[Willa Paskin]

As a Fed reporter, Brendan heard this all the time.

[Brendan Greeley]

The Fed creates money. They do it out of thin air. It's there because the state says it is.

[Willa Paskin]

But when Brendan got interested in monetary history, he began to realize that story is wrong.

[Brendan Greeley]

When we learn that the Federal Reserve is the origin of money, we have absolutely no way to explain how money worked in the 19th century because there was no Federal Reserve, it didn't exist.

[Willa Paskin]

The Federal Reserve was founded in 1913. Obviously we had money before then and we got it the same way we get it now.

[Brendan Greeley]

The system we still have today in America is a consequence of the Constitution, which is money comes from banks. Private commercial banks make almost all of the dollars that we use on a day to day basis.

[Willa Paskin]

Banks are a part of most of our lives. Most of us have money in them, the money that we use to pay for just about everything. And we also know that banks are big and powerful. When they fail or get into trouble, they can take the entire economy with them. And yet, for all their tremendous known powers, most people do not think of them as straight up creating money. And to really grasp how surprising this was, at least to me, I need you to understand the typical story about how money gets created. Basically, we need to explain the not quite right but widely accepted common wisdom about where money comes from in order for you to appreciate what Brendan is saying about banks. And to do that explaining for us and give Brendan a bit of a heat check. I went to someone with a keen interest in money.

[Mark Blythe]

Well, let's face it, who isn't interested in money. But I'm interested more in the sort of the behind the scenes sort of stuff.

[Willa Paskin]

Mark Blythe is a political economist at Brown University who teaches a course called the Architecture and Plumbing of Global Finance.

[Mark Blythe]

And it's based on the fact that like most people who do study this stuff read books that take things for granted, like it starts mentioning bonds and bills of exchange and swaps and derivatives, and hardly anybody ever bothers to tell you what this stuff actually is or where it comes from.

[Willa Paskin]

And so that's where Mark steps in to actually bother to explain the stuff we take for granted. Like for instance, where the money that circulates in the economy actually comes from. And Mark started with the aforementioned conventional wisdom about how the Fed makes our money.

[Mark Blythe]

If you ever get dragged kicking and screaming into a basic econ class and they bother to tell you about money, they tell you this story and it's called fractional reserve banking.

[Willa Paskin]

This story, the one you hear in Econ 101, starts with ordinary people making deposits, people like me, you're the depositor.

[Mark Blythe]

Willa comes along, drops 100 bucks into the bank. The bank says, I'll pay you 3% for a year for holding that. And you're like, well, I suppose that's better than sticking a mattress. Whoop dee doo. So you gave the bank the money. The bank then finds thousands of other Willas of different sizes and collects all of those deposits and then says, right, I've now got a million bits of currency. What am I going to do? I'm going to lend this on to all the people on the other side who want to borrow it. It's 6%. And that 3% difference is the spread that I make my money on. That's the basic model.

[Willa Paskin]

This is. This is the It's A Wonderful Life model of banking. Yes, right.

[Mark Blythe]

It is exactly right.

[Brendan Greeley]

You're thinking of this place all wrong. As if I had the money back in a safe.

[Mark Blythe]

The money's not here.

[Willa Paskin]

In the classic film It's a Wonderful Life, George Bailey, played by Jimmy Stewart, manages a Building and Loan association, which is not exactly a bank, but close enough for our purpose. People leave cash deposits in the care of the Building and Loan, but then there's a run on the bank. Everyone tries to withdraw their money at the same time, and it's a problem because it's not all there. The Building and Loan has lent it out just the way Mark described.

[Brendan Greeley]

Well, your money's in Joe's house. That's right next to yours, and in the Kennedy House and Mrs. Macklin's house and a hundred others. You're lending them the money to build, and then they're going to pay it back to you as best they can. Now, what are you going to do? Foreclose on them?

[Willa Paskin]

But what George Bailey doesn't explain because, well, nobody asks, is that his bank isn't just redistributing the deposits. If banks just took in money and lent out exactly what they took in, they'd just be middlemen. But they do more than that.

[Mark Blythe]

So banks don't just act as intermediaries. They act, if you will, as amplifiers.

[Willa Paskin]

Here's how it works. Let's say I've deposited $100 in the bank. The bank doesn't have to keep all that $100 on hand. It only has to keep a fraction of it in reserve. That fraction can change, but to keep the math easy, let's say 10%. So I deposit $100, the bank holds onto $10, and then it can lend out $90, say, to our producer, Max. Now, this may sound like it's just moving the money around from one place to another, but it's not. I still have $100. I can go to the bank and get it. But Now Max has 90 in his bank account, too, where there was just $100, now there's 190. Money has been created in the system. And there's one more really important part of this theory. The money a bank has in reserve, it doesn't just come from depositors. It also comes from the Federal Reserve, America's central bank.

[Mark Blythe]

The central bank decides there's a certain amount of what's called base money. And base money is going to go out into the banks and it gives that to the very big banks. And the very big banks then take that money and they go, all right, let's lend that out to the smaller banks. So they lend it out to the smaller banks, and then the smaller banks take that and use that as their reserves.

[Willa Paskin]

If a bank gets a million dollars from the central bank to hold in reserve, they can then loan out, say, $10 million. That $10 million shows up in other people's accounts. Voila. Money has been created. This is the theory of fractional reserve banking. The bank only has to keep a fraction of money in reserve, and the rest they can lend out, creating more money. So that's the Econ101 version of how money gets made. That's the way people tend to think money is created. But Mark and Brendan are united in saying that theory. It's not actually how almost any of the money we use today comes to be. There's another theory that's much closer to reality.

[Mark Blythe]

The theory called, wait for it, endogenous money. Right. Okay, what does that mean?

[Willa Paskin]

What?

[Mark Blythe]

No, I know exactly. No, the basic trick of economics is make things sound much more complex than they are so you can charge a premium. What's endogenous money? The idea that banks make the money themselves. And it's not really about depositors and it's not really about the reserves.

[Willa Paskin]

Banks are not intermediaries or amplifiers. They just straight up create money.

[Mark Blythe]

So imagine that Willa has a thing for motorcycles and she wants to buy a motorcycle, and it's a Ducati and it's going to cost her $15,000. So lacking the cash, you go to the bank and say, I'd like to buy a life ending motorcycle, please. And they go, yes, absolutely. There you go. So you put down 3,000 and then they lend you 12,000 to 10%, right?

[Willa Paskin]

Yeah.

[Mark Blythe]

Now, you could imagine a world in which some other will have funded that loan, right? Yeah, but they actually just make it up. They just immediately digitally credit $12,000 to your account. You go to the dealer, the dealer then just basically takes that and then sends it to another bank as a credit and you get a motorcycle. Now that's the creation of money. They've just created 12,000 like that, nothing, no bar.

[Willa Paskin]

Okay, stuff. You're saying that when they say, okay, here's $12,000, which they never give me in cash, but it's like in my account and then I give it to someone else that they made it up.

[Mark Blythe]

Yes.

[Willa Paskin]

Like, do you mean to say they don't they have it, right? Don't they have that?

[Mark Blythe]

They don't need to have it. I mean, they have other things. They've got billions in mortgages, they've got holdings of domestic and foreign bonds. I mean, they have billions in assets. You're not even a rounding error. But what they do with all of the people like you, and actually money in general, this is the story, they just go, all right, is it profitable to give Will a loan or not? And you look at your credit history, which is why all those numbers exist, and they decide you're a good credit risk and they give you the money for the motorcycle. And in doing that, they electronically create $12,000 of thin air. And then they give that to you. You give it to a bike dealer, the bike dealer gives it to their bank, Their bank now has $12,000 in cash. That's how it works.

[Willa Paskin]

In fact, no less than the bank of England has written that 97% of the money that we use in the modern world is created in this fashion. It even says this money, all 97% of it, is sometimes called fountain pen money because it's created by the stroke of a banker's pen.

[Mark Blythe]

Now, it's not as if you can do this with no consequences. If you make bad bets, you can go out of business. If you get too highly levered, right? You basically have too many loans out there that don't get paid back relative to your deposits. You got a problem. But most of the money in circulation that we use in any shape or form has been made up by a bank or similar financial institution. The notion that we fund 30 year mortgages off of like, you know, weekly deposits, it's just not how it happens.

[Willa Paskin]

And the money they give me for the mortgage I just made up, make it up. I just want to point out here that this theory, the endogenous money theory, is much simpler than the story of fractional reserve banking where depositors and the Fed give the banks money and they hold some of that in reserve and then they loan out a bunch more. And that creates more money in the system. That is a much more complicated mechanism than the banks just marking up new dollars when they make a loan. And yet I struggled with the Simpler version, it just seems too simple. That's how money gets made. A commercial bank makes it up. Shouldn't it be harder? Shouldn't the government be involved? It sounds like magic or make believe, like, poof, money has just appeared. But Brendan Greeley actually really hates this way of talking about it.

[Brendan Greeley]

You know, there's this idea right now that you learn when you take a freshman course in economics that money is a social convention. I mean, yeah, sure, but so is your mortgage. When you take out a mortgage, the bank is giving you brand new deposit dollars that it created on the spot. In return for those deposit dollars, it's getting from you a formalized promise to pay them back over time as per the terms of your mortgage. All of these things are explicit financial promises. And we're much better off thinking about those financial promises, examining them, trying to figure out, like, why they have meaning than just waving our hands and saying, look, it's all just a social convention. It works, don't worry about it. Because it's that that makes the whole thing seem like magic. It's not magic, it's finance. Like, we can understand it. We can have like a normal layperson conversation about why this stuff has meaning.

[Willa Paskin]

Like, I, I take your point. It's like these are part of large financial institutions with extensive and complex balance sheets. And it's not like they're just like, they're not like the tooth fairy, right? Like, this is how the system actually functions. It's not make believe. But when I hear like, the bank just writes the dollars up, I'm like, something about that just really seems wrong to me. And I suspect that like the real knock on effect of this is this thing that we all know is true, but this is like a really profound way of seeing it. Is that how powerful banks are?

[Brendan Greeley]

Yes, that's exactly right. They're insanely powerful. We've given them this power. And in return, like, we need banking regulation to make sure that they don't periodically blow up. Because bankers like to take risks. That's great for them. I'm really glad that bankers like to take risks. I'm not a banker, I don't like risks, but I'm glad that those people exist in the world. We need them, but they also need to be reined in with basic regulation to make sure that it doesn't endanger everybody's money. And if we don't understand. I think you're exactly right. If we don't understand that the bank, banks make the money, then we don't feel the same compulsion to make sure that they make it responsibly.

[Willa Paskin]

We have these kind of patriotic assumptions about our economic system that Alexander Hamilton and the founding fathers, full of strength and wisdom and fortitude, carefully created a financial system for us. They invented the dollar, which took over the world. Then their descendants sagely created a Federal Reserve and it took on all these powers so we can sleep easy. But the truth is stranger, more provisional, historically inflected, and weirder than that, as the truth usually is. But you can start to see it if you just take the dollar, the one in your hand, the one in your bank account, and look at it anew. This is Decoder Ring. I'm Willa Paskin. As ever, please consider signing up for Decoder Ring Plus. You get to hear our Decoder Rings Back episodes, skip all the ads and support the work that we do. You can join by going to the Decoder Ring show page on Apple Payment Podcasts or Spotify or visiting slate.comdecoder ring I also really want to tell you and encourage you to buy Brendan Greeley's forthcoming book the Almighty $500 Years of the World's Most Powerful Money. It comes out in late May and so you should pre order it now as a gift to yourself. You will not regret it. It contains so much more dense history and fascinating eye opening information than we possibly could have shared here. Do it. This episode was written by me and Max Friedman, who also produced it. Decoder Ring is also produced by Katie Shepard and Evan Chung. Our supervising producer, Merritt Jacob is Senior Technical Director. I'd like to thank Lizzie o'. Leary. If you have any cultural mysteries you want us to decode, please email us@decoder ringslate.com or call us at 347-460-7281. We'll see you in two weeks. When you manage procurement for multiple facilities, every order matters. But when it's for a hospital system, they matter even more. Grainger gets it and knows there's no time for managing multiple suppliers and no room for shipping delays. That's why Grainger offers millions of products in fast, dependable delivery so you can keep your facility stocked, safe and running smoothly. Call 1-800-GRAINGER Click grainger.com or just stop by Grainger for the ones who get it done.

[Verizon Commercial Voice]

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[Brendan Greeley]

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[Mark Blythe]

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[Brendan Greeley]

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