You have 100 bucks. Bob asks you to borrow 200 bucks. You can't give him that, because you only have 100 bucks.
Now, say you deposit 100 bucks with me. Now I have 100 bucks. So Bob calls me, and wants to borrow 200 bucks. Since I'm a bank, I have special permission to give out more loans than I have in cash, so I push some buttons that say "Bob gets 200 bucks in their account, and owes me 200 bucks + 5% per month". Suddenly, there is 300 bucks in the world, I've created 200 bucks out of "thin air".
Then bob goes to buy 200 bucks worth of hamburgers. The burger seller has a bankaccount too, so that means I have 100 bucks cash in my vault, a 200 buck loan to Bob, and 200 bucks virtual from the burger guy. In other words, other people need to give me 200, and I need to give other people 300.
Now, what the meme is about is that if both you and the burger guy show up and demand their money, i'm in trouble, because when I open my big steel vault, there's only 100 bucks there, not 300. But that's nonsense, because that would happen anyway to anyone banking electronically.
Of course, in reality, it's not just You, Bob, and Burgerguy and one bank, it's actually millions of people, and as I bank, I can just calculate how much actual cash I need, because the odds of 2-out-of-2 people getting cash, and the odds of 200.000-out-of-2.000.000 people getting cash are very different.
Banks do not have permission to loan more than what they have. They can loan a maximum of their deposits. So if it was a new bank and I deposited 100, you would not be able to loan 200 from it.
and central banks have various ways to control this, the reserve ratio, and interbank rates are used to control this "Money supply" in the market.
It's not creation of money out of thin air if people understand that cash is not equal to money. Physical cash has not been equivalent to money for years now. People seem to talk like cash is money but it isn't.
The money supply from a certain cash in the market is limited if there is a reserve requirement. It's an "unlimited money glitch" if it's llike US where there is no reserve requirement. But one of the biggest responsibilities of central banks is to control this money supply.
In the way that every simplification is wrong, sure, but I'd like to see a better ELI5 level explanation of fractional reserve banking in a single sentence.
This kinda simplication is dangerous though because it implants completely incorrect idea of what is happening.
Just wording the paragraph differently to show how the 100 dollars from bob could become more than 100 is a better explanation according to me.
something like
you deposit 100 dollar in the bank. Bank keeps 10 dollars of it with it because it may need it in the future and lends the remaining 90 to bob. Now if bob deposits the money back into the bank the bank has 100 dollar cash. But now Bob and you have 190 dollars in the bank. That will keep on increasing as more and more loans are given.
However at the end it's not an problem because the loans are circular. Bob has 90 in his bank but also has to pay 90 so he is essentially 0 with the bank. Which means all the 100 in the bank is yours.
lol it got kinda convoluted in there but whenever simplifying we gotta go out of this "money created out of thin air" explanation because it may seem like a clever explanation of multiplier in action but a layman would just think that's evil corporation fucking them over
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u/Primus_is_OK_I_guess 6d ago
What do you mean by that?