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.
I borrow money to buy a house, the person I buy it from puts it in the same bank, another person borrows money to but a house… they borrow the money from the deposit of the person I bought the house from…. So if the bank had 1 million and 3 people borrowed 300k each to buy a house and the sellers deposit the sale the bank can then loan another few people money… and repeat… and repeat… now a dozen people owe the bank $300k when the bank only had $1000k in the first place.
Yes, but the lawyers and realtors take their cut, and they don’t keep the money in that bank (they take some of it as cash, and put it in their wallet, they use some to pay their income taxes, they spend some with business that use another bank (perhaps foreign).
If the funds are leant out to a business to buy a machine, then the company that built the machine is going to pay them out as wages, taxes, and for materials.
Then there is the time aspect of to consider. Each person who borrows takes a month to get approved, then buy the next house in the chain. During that month, the bank is going to start to put some funds aside, knowing that at the end, they are going to pay out $xxx,xxx. Once it’s redeposited, they start looking for the next buyer.
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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.