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So is an explanation like this just incorrect? Or an oversimplification? https://www.investopedia.com/terms/f/fractionalreservebanking.asp https://www.investop

• skybrian 4y ago
  It's still true that reserves are only a small fraction of deposits, so the part about calling it fractional reserve banking isn't incorrect. But the Bank of England explanation is a lot better.
• spiralx 4y ago
  From the article you linked: > This is not how money is actually created but only a way to represent the possible impact of the fractional reserve system on the money supply. As such, while is useful for economics professors, it is generally regarded as an oversimplification by policymakers. And from the Bank of England's (very good) primer on money creation: > Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. > ... > Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits The "money multiplier" concept of FRB is a useful model in the same sense that modelling an atom as if it were like a solar system with a solid nucleus with electrons whizzing around it like planets i.e. not really 'true' but a useful-enough approximation for many use cases. The BoE primer explains all of this very clearly on the first couple of pages, it's well worth reading: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...