How Banks Make Money
Infographic: How to create money out of thin air.
Yes, the government prints our paper money. But that’s only a small fraction of the money in use. Most of the money in national economies is created when banks write it into their customers’ accounts out of thin air as bank loans.
You earn $100 and put it in the bank. And then…
The bank keeps $10 in its Federal Reserve account …
This is the “reserve,” which the bank uses when customers withdraw funds. As a rule, depositors don’t take out more than 10% of the money they have on deposit on any given day.
Then loans Susie $90, at interest.
Susie deposits the $90 in her bank.
That bank keeps 10% ($9) in reserve and loans Joe $81, at interest.
See how it all adds up—for the banks.
You now have $100 in your account. Susie has $90 in hers. Joe has $81.
There’s now $271 total in accounts that you and Susie and Joe can spend, and it all came from your $100 deposit. The banks have created an additional $171 by loaning it into existence.
|Imagine this money trick over and over.|
If you do this operation 50 times, that $100 turns into $995.25—$885.25 in loans, and your original $100.
Mad math: If those loans are for one year at 10% interest, the banks will make $88.53. If they’d only been able to loan your $100, they’d make $10.