Commercial banks create money through fractional reserve banking, where a portion of deposits is held in reserve, and the remainder is lent out, effectively multiplying the initial deposit within the financial system.
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[Music]
banks are allowed to create money
through a system called fractional
Reserve banking whenever you deposit
money the bank is legally required to
keep a certain percentage of it
somewhere safe but can lend everything
else here's an example based on a 10%
Reserve requirement John goes to his
bank and deposits
$1,000 John's Bank keeps $100 and lends
the remaining $900 to month there is now
$1,900 in the financial system John's
$1,000 deposit and Mike's $900 loan next
Mike uses the $900 to buy a laptop from
Karen then Karen deposits her $900 at
another bank the bank keeps 10% and
lends the remaining $810 to George there
is now
$2,710 in the system John's $1,000
deposit Karen's $900 deposit and
George's $810 loan this goes on and on
until John's initial $1,000 is turned
into approximately $10 ,000 Believe It
or Not commercial Banks actually create
more money than central banks
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