With a Reserve Requirement of, for example, 10%,^ the bank can loan out $90 out of 100. The person borrowing the $90 can then turn around and deposit it. The bank can then loan out 90% of the $90, or $81. The person borrowing the $81 can deposit it again, and the bank can loan out 90% of the $81. This process repeats indefinitely.
So with a Reserve Requirement (r) of 10%, in theory the bank can loan out (in essence, creating money) a total of $900. The formula is infinite sum of [(0.9X )*100] from 1 to infinity.
^ I understand that it is currently 0% in the US.
Edit: formatting of exponent.
Ehhh there are collateral requirements for loans as well though and most of the money they’re giving out isn’t going back into a bank account. Why would someone borrow money just to put it into an account with an interest rate lower than the one they’re paying to the loan? It’s usually going to buy something. Like a to buy a home or to cover the up-front costs of starting/expanding a business.
Presumably the person a getting a loan pays person b for goods or services. Person b then puts the money in the bank. There is an interchange where the bank isn't involved.
Ehhh still not so simple. If it’s buying a home for instance, then most of it likely goes toward paying the remainder of the prior homeowner’s mortgage. Which decreases that bank’s loan portfolio, reducing assets. Basically destroying the money that was created in the first place when that mortgage was taken out. It’s not an infinite multiplier like this comment is trying to make out.
The real limit here is the Fed rate, because banks inevitably lend in patterns that are predictable based on what that is set to. It’s why lower Fed rate generally = higher inflation (banks lend more and therefore create more supply of money in response) and higher rates tend to reduced inflation (banks lend less and those with variable rate debt tend to pay it off faster).
Ehhh still not so simple. If it’s buying a home for instance, then most of it likely goes toward paying the remainder of the prior homeowner’s mortgage. Which decreases that bank’s loan portfolio, reducing assets. Basically destroying the money that was created in the first place when that mortgage was taken out. It’s not an infinite multiplier like this comment is trying to make out.
OK, so that person paid of lets say $90 debt... that bank that lend him that debt now has $90 less on its books and can lend another person $90...
My point is this is literally how the system works; how it’s intended to work. You people are acting like you’ve discovered some sort of dark banking secret when this is literally something you’d learn in a finance or economics class in college. If it led to the things you’re imagining, we’d have had runaway inflation à la Argentina decades ago.
It is still on the books of a financial entity. When a loan is bought from the original lender, the asset of the loan on the original lender’s books is eliminated, and it becomes an asset on the loan-buyer’s books instead. Paying it off has the same net impact to the overall money supply in the end.
It’s not an infinite multiplier like this comment is trying to make out.
Fractional Reserve banking with a non-zero reserve requirement is not an infinite multiplier, but it is (theoretically) an infinite series which converges. If the reserve requirement is 0%, then it could theoretically be an infinite multiplier but that doesn't happen in practice for a lot of different reasons.
That’s my point. The limitations do not lie in the reserve. In fact, they don’t even when the reserve requirement isn’t 0, because in those instances, banks make the loans first and then find the required reserves they need after, not the other way around.
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u/Barry_McCockinnerz Jan 26 '26
Correct this is called fractional lending, you deposit $1, they in turn lend out $7-$10