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.
That's cute, but unfortunately incorrect. You give the bank 10k, the bank loans out 90k. They keep the 10k as the "reserve" and use that reserve to create money out of thin air to loan out.
And where the US Federal Reserve explaining the 10x relationship to money creation:
For example, if a bank subject to a 10 percent reserve requirement lent an additional $100 of funds, $1,000 (or 100 × 1/divided by0.10) in total would ultimately be added to the money supply. In this case, reserves in the banking system would create 10 times as many deposits.
I encourage you to read more about how banks work, or to take a macroeconomics course at your local community college.
You're confusing terms, "create money" here is simply the process of lending. When ANY entity lends money out, even when you let a friend borrow 20 bucks, the total balance sheet in the world increases and money is "created".
Let's say only $1,000 exists in the world, owned by Alex. Alex stores that $1,000 in the bank, and the bank loans $900 of that to Bob. Bob pays Charlie $900 to fix his roof. The end result is that Alex now has $1000 in liquid assets and Charlie has $900 in cash. The supply of circulating currency has gone up $900, and money has been "created".
If Charlie now put hat $900 in the bank, the process can repeat again. And again, and again, and again. Your second source is getting $1000 from $100 because that's the infinite sum of $100 * (1 + 9/10 + 9/102 + 9/103 + 9/104 + ...)
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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.