How do private banks create money?
Focusing on the majority of the US money supply, the method is as follows: The Federal Reserve Notes and equivalent Federal Reserve Deposits (mentioned above) are deposited in local banks or to their credit at one of the 12 Fed banks. These funds serve as the base of bank loans, which require a 10% reserve. For example, if $1,000,000 of Federal Reserve notes or Fed deposits are entered on the books with the Fed to the credit of a bank (usually the bank of the person or company which just sold the Fed a Treasury bond/bill or note), that bank may loan all of that money out (at interest), except for 10% which is kept as its reserve. Thus $900,000 in this example may be loaned out by that bank. In the usual case, the borrower of the $900,000 will not, of course, keep the money under the mattress, rather, it is deposited either in the same bank or in others. This $900,000 in new deposits may then be loaned out at interest by these banks, except for the 10% reserve. Thus $810,000 is loaned o
