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You're not accounting for fractional reserve banking, where the banks only need to keep a certain amount of deposits on hand, and can loan the rest out to other
by erickt 11y ago
You're not accounting for fractional reserve banking, where the banks only need to keep a certain amount of deposits on hand, and can loan the rest out to other people. For example, you deposit $100 into a bank. They keep, say, $20, and loan Erin $80 out to another person. This essentially creates money out of thin air since you still legally own that $100 dollars, and but now Erin has $80, bringing the total amount of money in our little economy to $180.
This all works fine assuming you don't try to withdraw all $100 since they only have $20 on hand. Nor would it be good if Erin defaults on her debt. Or the bank collapses. This is what FDIC is there to protect, where the government will create new money in case things collapse.
- weavie 11y agoIndeed. And what will Erin do with that money? She will give it to Tony in exchange for some service. What will Tony do? Pay that into his bank account. Which means the bank now has an extra $70 (assuming they keep a $10 reserve) that it can loan out, bringing the total amount of money in our economy to $250. Also that $80 that Erin borrows will need to be paid back with interest. Say the interest is $20. She pays back $100. The bank now has $120. That $20 that she paid back had to come from somewhere. Say she sold a blanket she knitted to Paul to make that extra $20. Where did Paul get that money from? He had to borrow it from the bank. And the cycle continues...
- dzhiurgis 11y ago> but now Erin has $80 Yeah but Erin had to put his house for getting his loan.