Banks can create money just by making loans, it’s like turning a small piggy bank into a bigger one.
Imagine you have a piggy bank, and it has $10 in it. You go to the bank, and they say, “We’ll lend you $90!” So now, you have $100, all because the bank gave you money to borrow. But here’s the twist: the bank didn’t just take that $10 out of its own piggy bank; it made up the other $90.
That’s how banks create money, they lend more than they have, and poof, there’s more money in the world.
How It Works Like a Playground
Think of the bank as a playground with a big piggy bank. When you borrow from it, it adds money to your piggy bank but keeps some for itself. The next time someone borrows, the same thing happens, and soon, there are lots more coins in everyone’s piggy banks.
It’s not magic; it’s just clever math! Banks can create money just by making loans, it’s like turning a small piggy bank into a bigger one.
Imagine you have a piggy bank, and it has $10 in it. You go to the bank, and they say, “We’ll lend you $90!” So now, you have $100, all because the bank gave you money to borrow. But here’s the twist: the bank didn’t just take that $10 out of its own piggy bank; it made up the other $90.
That’s how banks create money, they lend more than they have, and poof, there’s more money in the world.
Examples
- A child deposits $10 in the bank, and suddenly the bank has $100 to lend out.
- The bank lends $90 to a neighbor, who then spends it at a store.
- That store owner deposits the money back into the bank, creating even more money.
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See also
- How is Money Created? – Everything You Need to Know?
- How Does Circular Flow Diagram In Economics | Think Econ Work?
- How Does 4 Failed Currencies Work?
- George Selgin: Do we really need Central Banks?
- How Does Econ 101: Trade Offs and Opportunity Costs Explained! Work?