How Does Fractional Reserve Banking Explained in One Minute Work?

Imagine you're running a toy store, and every time someone buys a toy, you promise to give them more toys later, but you don’t actually have all those extra toys yet. That’s fractional reserve banking in one minute!

At first, your toy store has 100 toys in stock. You tell customers that if they bring a toy to you, you’ll give them 10 more, like a special treat. So when the first customer brings their toy, you hand them 10 new ones from your shelf. Now you have 90 toys left.

But here's the trick: even though you only had 100 toys at first, you promised more than that. You didn’t need to keep all the toys in stock, just enough to make people believe you’ll always be able to give them more.

A bank works like your toy store. When someone deposits money, the bank keeps a little bit aside (like keeping some toys), and lends out the rest (like giving out extra toys). That way, the bank can help many people at once, just like you helping multiple customers with their special treats!