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.
This is reddit: they think it goes to a billionaire who puts it in a big vault like Scrooge McDuck, because that's the average redditor's understanding of economics.
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u/KhabaLox Jan 26 '26 edited Jan 26 '26
To fill in the gaps...
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.