What's you're saying is actually not true. Unfortunately, it seems that almost everyone on the internet gets this wrong. The correct calculation goes as follows

What's you're saying is actually not true. Unfortunately, it seems that almost everyone on the internet gets this wrong. The correct calculation goes as follows: If you deposit $10 then, assuming a 10% reserve rate, the bank will keep $1 and loan $9. In return, you get a $10 bank balance, so the money supply has increased by 10$. However, the money that was created cannot be loaned again. You can't loan your bank balance to someone else, and neither can the bank. However, the remaining $9 cash can be re-deposited by someone else. Again, the bank keeps 10% and lends the remaining $8.10, creating a $9 account in the process. Then the $8.10 can be re-deposited and so on. The total amount of money that can be created is therefore given by the equation m = d/r where d is the initial deposit, r is the reserve requirement percentage and m is the amount of money created. So for my example, the maximum money created is $100. http://en.wikipedia.org/wiki/Fractional-reserve_banking#Money_multiplier http://en.wikipedia.org/wiki/Fractional-reserve_banking#Mone... What confuses everyone is that in normal circumstances, banks don't give cash-in-hand loans. Instead, they open an account for the borrower, who has the option of withdrawing that cash, but will probably leave it there. In effect, the $9 has been immediately deposited back at the bank, where it can be reloaned. This doesn't really change anything though. It just means that the same bank is reloaning the money rather than a different bank. The total money loaned to the bank is effectively $19 (the original $10 plus the borrower who has loaned their borrowed money back again). If the borrower transfers the money to another account, then a different bank will hold the money, but it makes no overall difference to the system.