Create an analogy or metaphor that explains how banks create and destroy money – one that would be understood by someone with absolutely no background in economics.

An analogy that could be used to explain how banks create and destroy money is the concept of a “money fountain.” Imagine that the bank is the owner of a fountain, and the money is the water flowing out of it. The bank will issue a loan by turning on the fountain, allowing water to flow. When the borrower makes purchases or pays bills with the loan, water flows from the fountain into the economy and creates new money. In order to make more loans, the bank may use the collateral from the loan to increase the flow of money. However, if the borrower is unable to pay back the loan, the bank may have to “turn off the fountain,” effectively destroying the money and reducing the overall amount of money in circulation.

In response to your classmate’s discussion, it is accurate that banks create money by issuing loans, as the loan creates new funds that did not previously exist. Banks don’t actually create money. A bank lending money is creating debt which the borrower has to repay with interest. The funds for the loan are usually generated through the bank’s own capital or by borrowing from other financial institutions. Banks play an important role in the creation and destruction of money. However, banks are not able to control all aspects of it and must be subject to regulation to maintain stability.

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