It increases the money supply because instant access deposits are counted as money. My thought experiment isn't strictly correct, as the money lent by our frien

It increases the money supply because instant access deposits are counted as money. My thought experiment isn't strictly correct, as the money lent by our friend isn't going to meet the criteria for instant access deposits, but the principle is the same. The "magic" thing about banks is that when you lend them money, it still counts as money that you have. The workings in your example if I am a bank: Me: $50, customer 1: $50, customer 2: $50. Total $150. Customer 1 deposits $5 with me and I lend it to customer 2. Me: $50 (my reserves are unchanged), customer 1: $50 (because for the purposes of money supply, the deposit still counts as their money). Customer 2: $55. Total $155. The counter intuitive bit is the fact that money supply treats deposits as money.