Can you explain how banks create money?

how can a bank create money by taking a persons money thta he deposited in the bank and use that for a loan? that would not create money?

Expert Answers

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Yes, it definitely does create money when banks take your deposit and then they lend it out.  Here is how that works.

Let's say you earn $10,000.  That money is already part of the money supply.  But when you put it in the bank, it creates more money.  You put the $10,000 in the bank and you still have $10,00.

But then they loan out $9000 of it to someone else.  Now you still have your $10,000 and that other person has $9,000 and the bank has created $9000 of new money.

Now that person who borrowed $9000 puts it in their bank.  Their bank loans out $8100 of it.  Now your $10,000 has become $27,100 and there is $17,100 of new money.  And so on...

 

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