How do banks create money actually?
In a fractional reserve system, banks can loan a big portion of the deposits you keep with them. This is the way the banks makes money. This is in contrast to full reserve banking (doesn’t exist anywhere) where the bank just safely stores your money and whenever you ask back they can open the safe and give it you. The assumption is that not all people will come back asking for their deposits at the same time. Now, how does this increase the overall money supply? Here we call money supply as the sum total of all currency in circulation held by non-banking public + all deposits kept in the bank. Let us assume banks reserve ratio (how much they should keep as enforced by the law) is 10% and a freshly minted $100 comes into the hand of somebody in the system. The guy X with $100 goes to the bank and deposits it. Now, bank can loan $90 out of this $100 and keep reserve as $10. Let us say, person Y takes a loan for $90 for paying something, to Z. Z has has this $90 and has to keep it somewhe
