Bank A has $1.

Bank A creates $10 fractional reserve money and deposits into bank B.

Bank B now has $10.

Bank B creates $100 and deposits into bank A. Repeat

What stops banks from creating Infinite money?

"They can't lend $10 to another bank" Then can't they just use a shell company? Is that a real objection?

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    $\begingroup$ How does the bank "create" the $10? $\endgroup$ – ThisIsNoZaku Sep 25 '19 at 16:32
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    $\begingroup$ This is not how fractional reserve banking works. $\endgroup$ – zeta-band Sep 25 '19 at 16:42
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    $\begingroup$ Someone deposits \$1m in a bank. The bank can now lend out less than \$1m. It has to keep some to meet capital requirements. See e.g. consilium.europa.eu/en/policies/banking-union/single-rulebook/… $\endgroup$ – 410 gone Sep 25 '19 at 16:48
  • $\begingroup$ This is why the "fraction" in fractional reserve banking, is set to a number higher than zero. $\endgroup$ – BKay Sep 25 '19 at 17:02
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    $\begingroup$ That is not at all what @EnergyNumbers is saying, what he has said is correct. I think he understands his citation rather well $\endgroup$ – Brennan Sep 26 '19 at 4:20

@EnergyNumbers has said the answer in the comments but I want to make it crystal clear what it means as I think this misconception of fractional reserve banking may be widespread.

First, banks can lend to other banks. There is no shell company involved unless for some other reason.

Second, banks can lend to other banks, which then can lend back to the original bank, which then can lend to other banks, etc. How long can this process go? Infinitely - assuming your currency can be infinitely divided.

Then an infinite amount of money is created, right? No. At each step in this process the amount lent out is decreased. If your reserve requirement is 20%, then you can only lend out 80% not 500%. The following is a table from the Wikipedia page on the money multiplier that illustrates this process:

relending process without currency drain

So at the end of the process, what is the maximum amount generated? The inverse of the reserve requirement: in other words, for a reserve requirement of 20%, it will be 5x. Note this is not 5x per step but 5x at the end of an infinite number of steps.

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enter image description here

Take the above example:

As you can see 357 is lent from 100. So the 357 can be paid back with the loan, because it never disappeared, resulting in 357% growth and no ending debt, so you can repeat infinitely.

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  • $\begingroup$ Note that your answer is very similar to the answer already given. If you think there's something you might want to add, consider adding it as a comment instead :) $\endgroup$ – Art Sep 26 '19 at 16:51
  • $\begingroup$ So Infinite exponential growth $\endgroup$ – Isa Wal Sep 26 '19 at 16:54
  • $\begingroup$ Wait so you're saying that infinite amount of money could be created because you can do this infinitely many times? $\endgroup$ – Art Sep 26 '19 at 16:55
  • $\begingroup$ Yeah I mean you might need to buy bonds or something, the leverage would be insane and you'd get a good return $\endgroup$ – Isa Wal Sep 26 '19 at 17:10

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