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Money is debt

While each euro, pound, crown, rouble, dollar and yen of course is somebody’s asset, at the same time it is also somebody’s debt. Consumers carrying banknotes in their wallets hardly think of themselves as creditors; nonetheless, banknotes represent the central bank’s debt to banknote holders. Similarly, a bank deposit represents the bank’s debt to the customer.

Money is created when a loan is extended

Money is first and foremost created when someone gets a loan. The bulk of money represents banks’ debts to the public. When a bank grants a loan, both its assets and liabilities increase. The lending bank asks the customer to sign a promissory note and adds the resulting receivable to its assets. However, the loan is withdrawn only when the customer's account is credited with the equivalent amount, so that the bank's debts also increase.

As the amount of debts increases, so does the amount of money. The customer becomes aware of an increase in his account balance and notices that he has more money than a moment earlier. When the loan is repaid, the customer must arrange for the required sum to be available in the account. At repayment of the loan, both the bank’s debts and receivables are wiped off the bank's accounts. In practice, the amount of bank debt deducted from the customer's account is slightly more than the sum originally borrowed, as the bank collects interest on the loan and makes some other charges.

We have learnt that new money was created when the loan was extended and that the money ceased to exist when the loan was repaid in full. In fact, owing to the interest charged on the loan, the sum of money ceasing to exist was even somewhat larger than the sum of money created when the loan was extended. Why is the amount of money in the economy not gradually approaching zero? One key explanation is that money is not only created when a loan is extended but also when the bank pays expenses and distributes profits. The account balances of bank employees and shareholders increase on a regular basis, but the bank does not receive any rights to a claim in consideration of its staff expenses and profit distributions.

Central bank money is created when banks borrow from the central bank

Although the bulk of money is created in ordinary deposit banks, under the current monetary system the central bank is a necessity. To settle their debts to their depositors, banks have no options but to pay in cash, which is currently issued only by central banks.

Central bank money comprises banknotes in circulation and banks' deposits with the bank of banks, i.e. the central bank. An ordinary household will not have to deal with central bank deposits, but these deposits are important for banks. Understanding the debt character of money is not so easy when it comes to central bank money. When the central bank has a debt to the public holding banknotes, it is hard to say who is the liable party. In contrast to actual promissory notes, banknotes do not even have a maturity date.

However, central banks are not merely passive debtors, but also active conductors of monetary policy. By changing the key interest rates at which loans are granted to commercial banks or by trading in securities markets, central banks can regulate the amount of money available in the banking system.


The Bank of Finland issues banknotes in Finland with the permission of the European Central Bank. Euro banknotes exist in seven different denominations:  €5, €10, €20, €50, €100, €200 and €500. Euro banknotes are legal tender throughout the euro area. They feature architectural styles from different periods in Europe's history.

Issuance of €500 banknotes ended on 27 January 2019. However, the €500 banknotes already in circulation remain legal tender and can also in future be used for payment and retain their value.

Do you remember what colour the €200 note is? Or the code that tells you which national central bank has issued the banknotes? Take a look at the banknotes.

Security features identify a genuine banknote

Euro banknotes have several security features which are designed to distinguish genuine banknotes from counterfeits. No specific method needs to be employed for authenticity verification, and once the euro banknotes have become commonplace the authenticity verification will only take a few seconds.

The security features are easy to verify by three simple tests: feel the banknote, tilt it and hold it against the light. Take a closer look at the security features of the banknotes.