Creation of Money - Hypothetical Situation Imagine you sell me some consulting services. I don't have any cash, so I give you a $100 IOU instead. You now have a $100 Note Receivable on your Balance Sheet. 

My question is: Did we just create money?
No, you didn’t. All money is debt, but not all debt is money. 

There are two easy ways of thinking about this. The first is to think about the properties of money: unit of account, store of value, medium of exchange. Focusing on the latter two: 


Is the money you owe to me a good store of value? No offense, but I’d rather have cash or keep it in an insured bank account. So no, your debt to me isn’t a good store of value.
Can I use it as a medium of exchange (i.e., can I trade your debt to me to someone else as payment for something)? Not likely, so no, it’s not a medium of exchange.


The second is to do the accounting exercise and compare it to the case where a bank makes a loan. I’ll bold all the things that count as money in the hands of people in the real economy. In this case, it’s:


  Me
  
  
  My assets: \$100 owed from you
  My liabilities: \$0
  
  
  You
  
  
  Your assets: \$0
  Your liabilities: \$100 owed to me
  


Now compare the case where I deposit \$100 into the bank and the bank lends out \$50 to you (I’m going to ignore bank capital to make it clearer):


  Me
  
  
  My assets: \$100 owed from the bank (bank deposit).
  My liabilities: \$0
  
  
  Bank
  
  
  Bank assets: \$50 cash + $50 owed from you 
  Bank liabilities: \$100 deposit owed to me
  
  
  You
  
  
  Your assets: \$50 cash
  Your liabilities: \$50 bank loan
  


You’ll notice that in the first case, no money has been created, because I can’t pay anyone with your promise. In the second case, I have \$100 of money, because I can pull \$100 out of the bank (again, ignoring bank capital here) and pay someone with it, and you have \$50 of money because you have \$50 in cash (though you also have an outstanding loan for \$50), so the amount of “money” in the real economy has increased.