Banks can create money primarily by making loans that result in additional deposits.
When banks make loans, they credit the borrower's account with the loan amount, effectively creating new money. This process is referred to as fractional reserve banking. The act of lending money leads to an increase in the total money supply because the funds that are loaned out can be deposited into other accounts, which can then be loaned out again, creating a multiplier effect.
The other options mentioned do not accurately describe how banks create money:
- Illegally printing additional notes is not a legitimate method of money creation by banks.
- Paying interest to depositors is a cost of doing business for banks; it does not create money.
- Offering financial services, such as stock market brokerage, is a service provided by banks but does not contribute to the creation of money in the same way that making loans does.