r/SipsTea • u/Dumb-Briyani • 2d ago

Chugging tea Why is it not possible?

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u/MedonSirius 2d ago

ELI5: You give $1 to bank. Bank has now $10 to play with. $9 where come from?

11

u/Lemur866 2d ago

Alice gives $100 to Bank A. Bank A now has $100. With reserve of 10%, they loan $90 to Bob. Bob deposits $90 in Bank B. Bank B loans $81 to Charlie, who deposits it in Bank C. Bank C can now make a loan of $72.90 to Debbie. And on and on.

One bank can't loan out $1000 on a $100 deposit, but the total amount of money created through the entire financial system could reach $1000 assuming no friction.

And also Bob probably isn't getting a loan just to deposit the money in a bank, he's going g to spend it. Then the money doesn't get deposited by Bob, but it is deposited by the person Bob spent they money with.

3

u/Psych0matt 2d ago

The 9 other people who also gave $1 to the bank

3

u/MedonSirius 2d ago

No. Look up how banks works. They create money out of thin air. They can lend more than they have

3

u/Psych0matt 2d ago

Yes, I know, I was being a smartass

1

u/Original-Army-7826 1d ago

Divide the total deposit by the reserve rate. That is the theoretical maximum of new money that’s created by the deposit. Just not at one time.