Part 3: How Money Actually Works (and Why Most Don’t Know)

By Black Hills Financial Planning

Money feels simple on the surface. You work a job, you get paid in dollars, you spend those dollars at the store. If you save, the bank “keeps” your money safe. If you borrow, the bank “lends” you someone else’s deposits.

At least, that’s what most people believe.

The truth is far stranger — and once you understand it, you’ll see why so many families struggle financially despite working hard, saving diligently, and “doing everything right.” Money, as it functions today, isn’t what it appears to be.

The Myth: Banks Lend Deposits

If you ask the average person how banking works, they’ll tell you:

• People deposit their savings at a bank.

• The bank keeps some in reserve and lends out the rest.

• Borrowers repay loans with interest, which partly goes back to depositors.

It’s a neat, tidy picture. Unfortunately, it’s wrong.

Banks don’t just lend money that already exists. Instead, they create money when they make a loan.

The Reality: Banks Create Money Out of Debt

Here’s how it works: when you sign for a mortgage or car loan, the bank doesn’t move money from someone else’s savings into your account. It simply types numbers into your balance — and those numbers become brand-new money.

That money didn’t exist before. It was created by your promise to repay.

This means that nearly every dollar circulating in the economy began its life as a debt owed to a bank. And because the loan must be repaid with principal plus interest, there’s always more owed than there is money available. The only way the system keeps running is by issuing more loans, creating more money, and inflating the supply.

Why There’s Never “Enough” Money

If all debts were paid off tomorrow, the money supply would collapse — because almost all money is debt. That’s why debt feels normal in our society. Families are told it’s perfectly reasonable to have:

• A 30-year mortgage,

• Thousands in student loans,

• Multiple car payments,

• And revolving credit card balances.

But this isn’t just cultural — it’s systemic. Since money itself is created through borrowing, the economy requires debt just to function.

The Inflation Machine

Because money is constantly being created through lending, there’s constant upward pressure on prices. That’s why a dollar in 1950 could buy what now takes nearly $12. Inflation isn’t simply “things getting more expensive.” It’s the dollar losing purchasing power as more and more money is created.

This is why traditional savings strategies fail. Even if you put money in a bank account, inflation quietly erodes its value every year. As a result, most families run in place financially — working harder but not getting ahead.

The Hidden Cost: Compounding Interest

Now add in the effect of interest.

The average American family spends about three-quarters of their income on interest and taxes. That means only a fraction of what they earn actually builds wealth for themselves. The rest flows back to financial institutions and government.

Compounding interest is especially powerful — and dangerous. When you borrow, compounding works against you, growing balances faster than you can pay them off. But when you own the system (and earn interest instead of paying it), compounding can become your greatest ally.

Why Most People Don’t Know This

If the reality is so important, why doesn’t everyone know?

Two reasons:

1. Complexity – The mechanics of banking are often explained in jargon and technical language. This makes it difficult for everyday people to understand.

2. Incentives – Banks and governments benefit from the current system. It gives them tremendous power to expand credit, collect interest, and fund spending without raising visible taxes.

As G. Edward Griffin summarized in The Creature from Jekyll Island: the Federal Reserve is “the supreme instrument of usury” — a system designed to make perpetual interest payments unavoidable.

What This Means for You

Once you see that banks create money out of nothing and charge you for the privilege of using it, it changes how you view borrowing, saving, and wealth building.

It means that:

• Simply depositing money in a bank isn’t “making it grow.” The bank grows its profits by lending your money out — but you see almost none of the benefit.

• Relying on credit cards, loans, and mortgages keeps you trapped in a cycle where most of your income goes toward interest.

• Inflation quietly drains your savings year after year, even if you think you’re being “responsible” by storing money in a bank account.

Turning the System Around

Here’s the good news: once you understand how the system works, you can flip the script.

Instead of being the one paying interest, you can become the one earning it. Wealthy families like the Rockefellers have done this for generations by creating private family banking systems. They use tools like trusts and properly structured insurance to keep money circulating within the family, rather than sending it out to banks.

At Black Hills Financial Planning, we help everyday families apply the same principles. By setting up your own financial system, you can:

• Pay down debt faster without spending more each month.

• Earn interest on your own money instead of giving it to banks.

• Protect your savings from inflation and unnecessary taxes.

• Create a foundation of financial stability that you can pass to your children and grandchildren.

Conclusion

Money isn’t what most people think it is. It isn’t gold in a vault or even deposits waiting to be lent out. It’s debt — created by banks, sustained by interest, and eroded by inflation.

But here’s the empowering part: once you know how the game is played, you can choose to stop playing by the old rules. Instead of being trapped by debt and inflation, you can learn to make money work for you.

👉 If you’re ready to discover how to stop losing money to banks and start earning it for yourself, schedule a free consultation with Black Hills Financial Planning today. Education is the first step to financial freedom.