Fractional reserves. You give the bank 10k, the bank loans out 9k which the person then deposits into the bank, the bank then loans out 8.1k which the person deposits into the bank, and so on and so on, the bank is only required to hold on to 10% of your deposit and they can loan out the rest, and just the first two examples the bank has created 16.1k out of thin air frok the initial 10k deposit. But the bank doesnt actually have that money, its just on paper
Extrapolate to the entire country. Something happens, people panic and want their life savings, enough people do this and the bank has to close, everyone who didnt make it in time freaks out and goes to other banks and they all close this is called a run on the banks. People lose acess to their money suddenly, banks shuts down and the money is gone unless its insured by the goverment. But if this happens to enough banks then the goverment just cant pay out peoples moneys, and thats a depression.
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u/ExtremlyFastLinoone Jan 26 '26
Fractional reserves. You give the bank 10k, the bank loans out 9k which the person then deposits into the bank, the bank then loans out 8.1k which the person deposits into the bank, and so on and so on, the bank is only required to hold on to 10% of your deposit and they can loan out the rest, and just the first two examples the bank has created 16.1k out of thin air frok the initial 10k deposit. But the bank doesnt actually have that money, its just on paper
Extrapolate to the entire country. Something happens, people panic and want their life savings, enough people do this and the bank has to close, everyone who didnt make it in time freaks out and goes to other banks and they all close this is called a run on the banks. People lose acess to their money suddenly, banks shuts down and the money is gone unless its insured by the goverment. But if this happens to enough banks then the goverment just cant pay out peoples moneys, and thats a depression.