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

Fractional-reserve banking is like when your piggy bank can make more coins just by borrowing some from the bank.

Imagine you have a piggy bank that's also a bank. You put 10 coins in it, and tell the bank, "I only need to keep 2 coins here, I can borrow the rest if I want." So the bank gives out 8 coins to someone else who wants to buy candy.

Now there are two people with extra coins: you have your original 10, but the bank gave away 8. But wait! The bank only had 10 coins to begin with, how did it give away 8? Because the bank didn’t need to keep all of them. It only kept 2 coins as a reserve, and used the rest like it was its own money.

That’s fractional-reserve banking, keeping just part of your money, and lending out the rest. And when banks lend out money, they’re not just borrowing, they're making new money in the economy!

Every time someone takes a loan, that borrowed money gets used to buy things or start businesses, like seeds growing into plants. Then those people might put some of their coins back into the bank, and the cycle starts all over again.

So even though you only gave 10 coins at first, soon there are many more in the economy, just like a garden grows with more flowers each year!