Skip to main content

How does a single bank create money under the fractional reserve system?

A single bank creates money under the fractional reserve system by lending out more money than it takes in in deposits.  This is one reason why banks are so important in our system.


When a person deposits money in the bank, that money does not simply sit there.  Instead, the bank loans it out.  The bank is not allowed to loan all of the money out.  It has to keep some fraction of the money...

A single bank creates money under the fractional reserve system by lending out more money than it takes in in deposits.  This is one reason why banks are so important in our system.


When a person deposits money in the bank, that money does not simply sit there.  Instead, the bank loans it out.  The bank is not allowed to loan all of the money out.  It has to keep some fraction of the money in what is called reserves, thus the term “fractional reserve” banking.  When it loans that money out, it creates money that had not existed before.


Imagine that you deposit $1000 in the bank.  Let us say that the bank is required to keep 10% of that money in reserves.  It then lends me $900.  It has created $900 that had not previously existed.  You still have the right to $1000, but I also have $900 in money that the bank just created.  Now imagine that I deposit the $900 that I borrowed in my account.  The bank would have to keep $90 of it (10%) in reserve, but it could still loan out the other $810.  Now, the bank has created $1710 that did not exist before.  This could go on and on, with the amount that the bank creates getting larger and larger.  This is how a single bank can create money under the fractional reserve system.


Comments

Post a Comment

Popular posts from this blog

What is the meaning of "juggling fiends" in Macbeth?

Macbeth is beginning to realize that the three witches have been deceiving him since he first encountered them. Like jugglers, they have kept changing their forecasts in order create confusion. This is particularly apparent when the Second Apparition they raise in Act IV,   Scene 1 tells him that no man of woman born can overcome him in hand-to-hand battle--and then Macbeth finds himself confronted by the one man he has been avoiding out of a... Macbeth is beginning to realize that the three witches have been deceiving him since he first encountered them. Like jugglers, they have kept changing their forecasts in order create confusion. This is particularly apparent when the Second Apparition they raise in Act IV,   Scene 1 tells him that no man of woman born can overcome him in hand-to-hand battle--and then Macbeth finds himself confronted by the one man he has been avoiding out of a sense of guilt, and that man tells him: Despair thy charm. And let the angel whom thou still hast serve...
Post a Comment
Read more

What are some external and internal conflicts that Montag has in Fahrenheit 451?

 Montag, the protagonist of Fahrenheit 451, faces both external and internal conflicts throughout the novel. Some examples of these conflicts are: External Conflicts: Conflict with the society: Montag lives in a society that prohibits books and critical thinking. He faces opposition from the government and the people who enforce this law. Montag struggles to come to terms with the fact that his society is based on censorship and control. Conflict with his wife: Montag's wife, Mildred, is completely absorbed in the shallow and meaningless entertainment provided by the government. Montag's growing dissatisfaction with his marriage adds to his external conflict. Conflict with the fire captain: Montag's superior, Captain Beatty, is the personification of the oppressive regime that Montag is fighting against. Montag's struggle against Beatty represents his external conflict with the government. Internal Conflicts: Conflict with his own beliefs: Montag, at the beginning of th...
Post a Comment
Read more

In A People's History of the United States, why does Howard Zinn feel that Wilson made a flimsy argument for entering World War I?

"War is the health of the state," the radical writer Randolph Bourne said, in the midst of the First World War. Indeed, as the nations of Europe went to war in 1914, the governments flourished, patriotism bloomed, class struggle was stilled, and young men died in frightful numbers on the battlefields-often for a hundred yards of land, a line of trenches. -- Chapter 14, Page 350, A People's History of the United States Howard Zinn outlines his arguments for why World War I was fought in the opening paragraph of Chapter 14 (referenced above). The nationalism that was created by the Great War benefited the elite political and financial leadership of the various countries involved. Socialism, which was gaining momentum in Europe, as was class struggle, took a backseat to mobilizing for war. Zinn believes that World War I was fought for the gain of the industrial capitalists of Europe in a competition for capital and resources. He states that humanity itself was punished by t...
Post a Comment
Read more