How does fractional-reserve banking create money in an economy?

Fractional-reserve banking is like when a piggy bank lets you take out more money than it has inside.

Imagine you have a piggy bank that only needs to keep 10 coins for every 100 coins you put in. That means if you deposit 100 coins, the bank can lend out 90 of them to someone else. The person who gets the loan might use those coins to buy something, like ice cream, and then maybe they’ll put some of that money back into another piggy bank.

Now, that second piggy bank also only needs to keep 10 coins for every 100 coins it has. So if someone deposits 90 coins, the bank can lend out 81 more coins, and so on!

This means the same money gets used over and over again, like a game of tag. Each time the money is lent out, it creates new money in the economy, just like how playing with your friends makes everyone happy at once.

1. You deposit 100 coins.
2. The bank keeps 10 coins and lends out 90 to someone else.
3. That person uses the 90 coins, maybe buys something, and deposits 90 coins into another bank.
4. This new bank keeps 9 coins and lends out 81 more, and the game continues!

That’s how fractional-reserve banking helps create more money in an economy, not by magic, but by clever sharing!