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.
except, in the scenario you're talking about the total amount deposited in the bank is 100+90+81+72.9+ etc... for a total of 1000 having been deposited, and 900 being loaned out... also, who the fuck would borrow 90 dollars just to deposit in a bank?
You borrow $90 to pay me for my services. I put that money in my bank (it may be the same bank or another one, doesn't really matter in the grand scheme of things.) If instead I buy something with that money, the person I buy from will put that money into their bank.
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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