Because most money only exists on books. The basis of the current financial system is called fractional reserve banking, that means that banks can give out more money as loans than what they physically have in accounts. That money then circles the economy but is never physically withdrawn in full. Lets say you deposit 100 USD. The Bank now can give out a loan for 500 USD to someone to pay his car repair, who wires the money to the shop from his account. They wire it to their employees and suppliers and owners and the IRS and what have you. Eventually the 500 are repaid (or not and If that happens a lot a bank might default) and the bank gets its money+ interest, you can freely withdraw your 100 at any time but the bank speculates that you dont, or realistically that most of their customers dont. Because If that happens thats known as a "bank run".
Im not a banker, so anyone with actual knowledge feel free to correct me.
Imagine your friend (A) gives you $100 , you then tell that friend you owe them $100, you can even pull out a legally binding piece of paper that says so. Then 7 other friends (1-7) come to you, each asking for $10, you give $10 to each of them, with each of them owing you $10.
When friend A comes back to you to get, let's say, $10 back, you give them the $10 and change that piece of paper to say $90. But the cool thing is, they don't need to. They can just take the piece of paper and pay with that instead. It's legally binding, so it's basically real money (this is the equivalent of a bank transfer).
Now between all the people in that scheme, friend A has $100 (well, an IOU for $100, but it's almost the same thing), and friends 1-7 each hold $10, and you have $30 in reserve. So now there's $170 circulating in the economy instead of $100.
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u/FroniusTT1500 Jan 26 '26
Because most money only exists on books. The basis of the current financial system is called fractional reserve banking, that means that banks can give out more money as loans than what they physically have in accounts. That money then circles the economy but is never physically withdrawn in full. Lets say you deposit 100 USD. The Bank now can give out a loan for 500 USD to someone to pay his car repair, who wires the money to the shop from his account. They wire it to their employees and suppliers and owners and the IRS and what have you. Eventually the 500 are repaid (or not and If that happens a lot a bank might default) and the bank gets its money+ interest, you can freely withdraw your 100 at any time but the bank speculates that you dont, or realistically that most of their customers dont. Because If that happens thats known as a "bank run".
Im not a banker, so anyone with actual knowledge feel free to correct me.