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The Money Multiplier

242 447 views | 25 Jul. 2017

When you deposit money

When you deposit money into a bank, do you know what happens to it? It doesn’t simply sit there. Banks are actually allowed to loan out up to 90% of their deposits. For every $10 that you deposit, only $1 is required to stay put.

This practice is known as fractional reserve banking. Now, it’s fairly rare for a bank to only have 10% in reserves, and the number fluctuates. Since checkable deposits are part of the U.S. money supplies, fractional reserve banking, as you might have guessed, can have a big impact on these supplies.

This is where the money multiplier comes into play. The money multiplier itself is straightforward: it equals 1 divided by the reserve ratio. If reserves are at 10%, the minimum amount required by the Fed, then the money multiplier is 10. So if a bank has $1 million in checkable deposits, it has $10 million to work with for stuff like loans and reserves.

Now, typically, the money multiplier is more like 3, because banks can always hold more in reserves than the minimum 10%. When the money multiplier is higher, like during a boom, this gives the Fed more leverage to move M1 and M2 with a small change in reserves. But when the multiplier is lower, such as during a recession, the Fed has less leverage and must push harder to wield its indirect influence over M1 and M2.

Next up, we’ll take a closer look at how the Fed controls the money supply and how that has changed since the Great Recession.

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Andrew's Travel Update


Nor Sailah

i have always hate makroekonomi so just by reading a book cant help me to understands. thanks to prof alex now i understands better.


So a loan counts as a deposit but not a transfer?

Pee Poo

The Federal Reserve is NOT Uncle Sam....


Does 0 crr mean infinite money in economy

Herbert Spencer

https://www.youtube.com/watch?v=iiKr-i022mY ......... The Progressive Growth of the Money Supply Principle (year 2013) tells us the exact quantity of new money the economy needs to works correctly, driving us to the Wicksell interest rate or natural interest. This principle will force central banks to change monetary policy.


Whoever put Chinese subtitles on this video, appreciate that dude.

tomas nobrega

best video on this topic, thank you and looking forward for more content

Alpha Lobster

As if a bank would hold more than the minimum...especially in the current environment. In fact, I bet most banks consider the minimum reserve requirement as a target.


Oh No!. Not the money multiplier myth again.

If you really want to understand how modern banks work and prepared to make the effort then I suggest the following :-

The Bank of England - They should know as they run the show in the UK. As part of their Quarterly Bulletin for Q1 2014 they published :-

"Money creation in the modern economy" ref

The Federal Bank of Chicago - Published back in the 60's and unfortunately no longer available from their web site entitled :

"Modern Money Mechanics" A Workbook on Bank Reserves and Deposit Expansion available from http://www.rayservers.com/images/ModernMoneyMechanics.pdf

The UK based campaign group positive money have a good series of video's explaining things although not always perfectly.


Also worth a read from the BOE :-


and from CNBC an article Entitled "Basics of Banking: Loans Create a Lot More Then Deposits"


Happy reading and eventually you may see the light, its not complicated at all when you realise how it works in real world terms and it all makes Logical sense.

Hugo Lachs

I like your videos a lot but this video is incorrect. See  "Money Creation in the Modern Economy" by the Bank of England.

mahmoud galal

thank you sooooooooooooooooo much

Florine Clara


David okafor


Brittany G

great visuals!!!!

Vatsal Lahoti

nice animation. thank you sir!


anybody know how much banks pay to create the coins and bills to be use by people ???

Noor Taiyeba

do people borrow the money to deposit it in the bank again?

Kahil Sev

pace for explaining the concept is adorable, luv u grandpa


The full formula for the money multiplier is 1/(reserve ratio) x 100 otherwise 1/10 would be 0.1 and that is NOT the multiplier as stated in your video - would be great if you made this clear other people might find it confusing

Indu Goyal

wow video.....simply good

Anggara Adhari

Thank you

Vatsal Naik

Thank you so much Professor for crystal clear explanation. This concept is fixed inside my head and never to forget :)

Ruben Antonio

But what happens to the money multiplier if say, the European Central Bank were to lower the intrest rate? does it increase because of a greater cash preference or does it decrease because of it?

Mehad Khattak

Amazing way of teaching ....


Banks don`t lend anything. They create money out of thin air. Crisis happens because banks overlend and bigger % of personal income is dedicated to paying credit. Also because theres not too much investment in real industry and instead banks use credit to collect rents from the economy.


So it's theft. What you just described is theft with some extra steps.

James Dean

Banks don't actually loan out other customers deposits directly to other customers. They create a brand new account and they add that new money to the persons account and because of the DR and CR rule of financial accounting there are actually two accounts made up in the banks electronic records, money is created. This new money is not from customers deposits, it is from the banks ability to create loanable funds which in turn a customer uses to make investments in goods, services and property. That is where growth comes from.

Sanya Mahajan

what happens to money multiplier and reserve ratio during financial crisis

Игрулька Игрулька


Frank Cui

the fact that this 6 mins vid explained money multiplier better than my prof did in 30 mins


"In the modern economy, most money takes the form of bank

deposits. But how those bank deposits are created is often

misunderstood: the principal way is through commercial

banks making loans. Whenever a bank makes a loan, it

simultaneously creates a matching deposit in the

borrower’s bank account, thereby creating new money.

The reality of how money is created today differs from the

description found in some economics textbooks:

• Rather than banks receiving deposits when households

save and then lending them out, bank lending creates


• In normal times, the central bank does not fix the amount

of money in circulation, nor is central bank money

‘multiplied up’ into more loans and deposits." Money creation in the modern


By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.

Hadassah Sharon

If $1 makes $10 in the money multiplier, where does the $9 come from?

Fergal Downes

Heya buddy, extremely good stream that you have here. Nice one.


But banks can not control CRYPTO ha ha ha

Sonali Devi

? amazing

Shamma Alali

what about multiplier effect in economics ;(

Abundance America - Health, Wealth & Wisdom

So the more that’s deposited, the value of the currency decrease because supply increased?

Other words when interest rates are higher, the supply of money is high because businesses tend to hold off loans due to the cost of burrowing, but if consumers demand loans then that’s a set up for a economic downturn in the future.

RMJ 100

I never knew how it worked but this is so clear so I know understand it! Thanks

Dwain Dibley

There is no such thing as the "money multiplier", it's a moronic fiction that has been debunked countless times. When you deposit cash money into a bank, it does indeed stay in the bank as reserves, and only leaves the bank as withdrawals. Banks do not loan out their reserves, they do not loan money, period. Banks generate credit as deposits and call that a 'loan'.

Nick Greene

THIS IS INSANE! THEY JUST MAKE MONEY FROM NOWHERE! I'M SO FREAKING IMPRESSED! Also, great job explaining this. I had no grasp of the concept before watching, and now I feel like I could give a lecture on it.


In this example the new proceeds of the loan are deposited into the same bank. In real life it's deposited into competing banks. Then the lending bank has to compete for that new deposit in order to continue to make loans. They do this by raising the yield they pay on deposits. This increases the APR of the loans, which increases the bad loans. In other words banks create the boom and busts cycles of the economy.

Shmitt Reuben

The money multiplier is a lieeeeee


Bank no longer create money in this manner. This is outdated information. What banks do is to have the customers seeking loans sign promissory notes. The bank take these promissory notes and deposit them in a transaction account. The bank then converts this promissory note into endogenous money which is then used to create a check, or exchange for cash. THE MONEY DID NOT COME FROM ANY EXISTING DEPOSIT. It was created based on a signature. Once the promissory note is paid off the promissory note is void, and the money supply shrink accordingly.

The proof of what i am saying is in the empirical data in 2007. Bank reserves were in the tens of billions and consequently if you follow this model it should be in the hundred billion (about 200 billion if you follow this video). But instead we have credit upwards of 7 trillion. BANKS DO NOT LEND FROM DEPOSITS, THEY CREATE THEIR OWN MONEY BASED ON A DEBTORS SIGNATURE.

Mega Hestyani

thank you for ur explanation prof.

Boris Popov

Great content! Love it!

Ishan Kashyap

The NCERT book says it's (CDR+1)/(RDR+CDR) where CDR is cash:deposits , RDR is reserve:deposits

Uzma Saifi

Could you plz make vedio on other growth models.

Raktim Kanti Bhowmick

Mind-blowing ?

Andrew's Travel Update

This video is NOT accurate. Fractional reserve banking is 0%

Ken Dang

I still don’t get how 1 create 10$ ?

animation work

ok, I got it. the whole economy is a scam.

Frank Derik

I got a hacked transfer of $30,000 in my bank account were I received a transfer of $25,000 in my bank account.


Thanks grandma

yeni mustikasari

nama : yeni mustika sari
nim : 041434029
UPBJJ-UT jayapura
trimakasih vidio yang di berikaan


20years of schooling and Im learning this now

Rayudu Raavan

If depositor of money wants to take 100% money where bank lended 90% of his money to another? Is it possible? Not physical money. Atleast virtual in bank transfers? So using this mechanism can I form multiple banks and deposit or lend in other banks I have and withdraw 10x more money?

Kxng Melio

Thank you very much, this helped me

Louis Washington

ealogs com changed my life financially,i got another successful hack transfer of 25,000 from them

Zoomer Doomer

Wow, this is extremely asinine. Banks don't lend out deposits, banks create loans and then wait for deposits.

Frost qwerty

but it doesn’t work like that, sorry :(


Wrong, sorry =/

Frank Luke

In Alex's video, I see that Alex gave $1000 to the bank and the bank in turn gave $900 out of that deposit to Tyler. Then Alex goes on to say that now the bank has $1900....that is counting the $900 TWICE.....that looks like fraud, not accounting....nowhere does Alex explain this. I am sure he had a reason for not explaining that

al dajjal shah-e-dunya

I need to open a bank ASAP


Please provide tamil language subtitles also.

Vizhigalh Kangalh

very easy understandable video,,, awsome prof

Katie Stoll

hi you shouldn't put Chinese subtitles on any more video's

Ravi Bhatia

This one is a fantastic explanation, strange that had to wait so long for a credible and meaningful video on a relatively common topic.

Chelsea Quach

Can you be my professor? D:

Rudy R

so how do I use this without opening a bank? maybe I could do this online

Bradley Shimels

If you ignore ForEx trading for modern big name banks you'll never really understand how most banks make most of their profits in the Forex market!


So the deposit is not a real money (currency) ?

Balmeet Singh

Could n't understand from 2:10 - 3:10
because if bank lends money to tyler , tyler will suppose use that whole money for his business,so how come bank has tyler's money as checking account and how can bank give loan to others with his money if he has used that money for his business and not kept in bank???


But who is borrowing money simply to keep in a minimal interest bearing checking or savings account. If someone takes out a loan aren’t they going to then use those funds for some purpose rather than just leaving in a bank account.


The fractional reserve/money multiplier system has been out of date for some time now. Richard Werner explains here https://www.youtube.com/watch?v=IzE038REw2k
This is important, as there is no limit per say how much wide money can be created as this video suggests. Banks also choose how this new money is allocated, for productive/consumer or speculative purposes.


Very surprised at the number of clued-in people in the comments regarding endogenous money.... I wish academic economists were as quick to react to it, I have seen scant evidence of them even entertaining the idea in what little time I've spent studying the issue.

Is it because it would shatter most of the models CBs use, or is it maybe that it would immediately call into question their legitimacy? They obviously know how all of this works, I just don't understand why they won't even begin the process of analysing it.

Herbert Spencer

https://www.youtube.com/watch?v=iiKr-i022mY The Progressive Growth of the Money Supply Principle (year 2013) tells us the exact quantity of new money the economy needs to works correctly, driving us to the Wicksell interest rate or natural interest.

Vyacheslav Lenskyy

I don't get it. What is the purpose to get credit money and keep it in the checking account? When I need money I usually spend them.

Tyrell Wellick

So the fractional reserve system is just a legal form of counterfeiting only allowed to privileged banks... in other words fraud.

saurav kumar


Howie Dick

Fucking brilliant

Anurag kumar

Money Supply(M3) = Money Multiplier * Money Issued by Govt.(M0)

Yosua William

Fuck, i really regret choosing this course, i don’t understand


A couple of points to consider: It says "uncle sam" can create this money; the Federal Reserve is actually not our government! The scenario also assumes that someone takes out a loan, only to have them put it in the bank (fairly unrealistic).

Esteban Escudero

Great video

Marilyn Wagner

You are wonderful. Thank you for the explanation.

Milen Metodiev

Thank you very much, this helped me


One thing that you do not mention but is very important to this concept is that there is an other option. Banks could make money on interest without creating new money. It would require loaning out reserves which would be held for a set period of time. Example: Arnold deposits $100 into an account and agrees to receive 1% interest in 6 months, but also agrees not to take out the money for 6 months (like a C.D.). Betty then borrows $100 from the bank and agrees to pay back the money within 6 months plus 2% interest. Then in 6 months Arnold is able to take out his $100 deposit plus his $1 interest. And the bank collects its $1 profit. This would be pure banking, where the profit is earned from the service of connecting loaners and borrowers together. Our system of banking allows the banks to make interest on the money that they are creating (which in turn turns into inflation -- rising average prices).

This would be real growth rather than inflation because the loan would contribute (to a far greater extent) toward innovation rather than pure spending.
Why is this concept something that you do not bring out in the explanation?

Bradley Shimels

Actually bank members cash deposits are used mostly in ForEx trading for the bank's own profits ! A multi trillion dollar market and the biggest world market in money! Good luck!

Amir Sayed

So in the end it all comes down to a clown called Uncle Sam.

Noy Nemenzo

Sorry, but there's something i dont quite understand. In the example, new money is created when somebody makes a loan and puts the money in their account. But what is the point of taking out a loan only to put the money in the bank? Don't people who take out loans usually have something to spend the money on? Or is there something im missing? Thanks


Excellent explanation, thank you!

Kiril Mihaylov

this guy is very good at explaining something 95 % of world population doesn't have a clue about ....after watching the video they still can't get it .....

Peace and Relaxation

If A borrows 100 Dollars from B, then is the total money in circulation equal to 200....? Please can anyone verify?


Great explanation Prof. Alex!

Adem Mustafa

I never leave money at the bank...well I don't have any money so..


The myth of the money multiplier

By Steve Keen
Business Spectator
6:09PM October 22, 2012

Three Business Spectator readers contacted me directly about one topic last week – bank money creation, and how bank reserves work. Following an old journalism adage that three direct enquiries about a topic from the public means that everybody’s interested in it, I’m diving into wonkdom to answer their queries in detail here. Ignore this post if the adage isn’t true for you, but if it is and you haven’t yet had your morning Java, now’s the time for that stroll to the barista.

OK, caffeinated? Here we go.

The standard story about how banks create money, and how reserves work, is the "Money Multiplier Model”. Money creation starts with the government injecting "fiat money” into the economy – say by giving a welfare recipient $100 in cash. That recipient then deposits the cash in a bank, which hangs on to a government-mandated fraction of it (the "Reserve Requirement”) – say 10 per cent or $10 – and lends out the rest to a borrower. The borrower then deposits that $90 in another bank, which does the same thing – hangs onto 10 per cent of the $90 or $9, and lends out another $81 to another borrower.

The process repeats ad infinitum, and in the end a total of $1,000 is brought into existence: the original $100 in cash, plus $900 in credit money created by the private banking sector (matched, of course, by $900 in debt).

This alleged system, known as Fractional Reserve Banking, is seen as "fraud” by Austrian economists, and by many in the public. To inflationists, because Bernanke has hit the printing presses, dramatically increasing Base Money, and therefore money in circulation will soon explode, leading to hyperinflation.

To Neoclassical economists, it’s just the way banking works: bank lending is controlled by the Fed because, "even if banks hold no reserves”, Fed control over the currency means that private banks must do what the Fed wants.

And to anyone who’s done empirical research, it’s a myth.

The most recent proof of this is in an excellent discussion paper from Federal Reserve economists Carpenter and Demiralp, entitled "Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?”. The first clue that it doesn’t exist is given by their abstract, which notes that, "before the financial crisis, reserve balances were roughly $20 billion”. If the textbook model were correct, the total stock of money in the USA would be $200 billion, versus the multi-trillion dollar level of even a narrow definition of the money stock. As the authors note, this makes a mockery of the textbook "Money Multiplier” model:

M2 averaged about $7.25 trillion in 2007 … bank loans for 2007 were about $6.25 trillion... if we consider the fact that reserve balances held at the Federal Reserve were about $15 billion and required reserves were about $43 billion, the tight link drawn in the textbook transmission mechanism from reserves to money and bank lending seems all the more tenuous.

I’ll stop there on trashing the conventional model – save to quote Carpenter and Demiralp’s conclusion that "the textbook treatment of money in the transmission mechanism can be rejected” – and get to the real issue: if the Money Multiplier model doesn’t really describe how money is created, and how reserves figure in this, what does?

The short answer is "endogenous money”: bank lending creates deposits, so the decisions of banks to provide loans determine the level of money, and reserves are largely irrelevant.


¿What I don't get is at wich process is the new money printed?

Swapneel Rao

i have a question - if 900 USD is given to Tyler as a loan, why would that money stay in his account? He is taking that loan for some investment, so bank won't be able to roll that money.

Hamayoon Shah

Great Teacher

M1 currency

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Money creation in a fractional reserve system | Financial sector | AP Macroeconomics | Khan Academy

59 593 views | 13 Mar. 2018

Most people assume that

Most people assume that the government prints money, and that is how money is created. That is not entirely true. Watch this video to find out the role that banks play in the creation of the money supply. AP(R) Macroeconomics on Khan Academy: Macroeconomics is all about how an entire nationÕs performance is determined and improved over time. Learn how factors like unemployment, inflation, interest rates, economic growth and recession are caused and how they affect individuals and society as a whole. We hit the traditional topics from an AP Macroeconomics course, including basic economic concepts, economic indicators, and the business cycle, national income and price determination, the financial sector, the long-run consequences of stabilization policies, and international trade and finance. About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything https://www.youtube.com/subscription_center?add_user=khanacademy.

View more lessons or practice this subject at http://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-financial-sector/banking-and-the-expansion-of-the-money-supply-ap/v/money-creation-in-a-fractional-reserve-system-ap-macroeconomics-khan-academy?utm_source=youtube&utm_medium=desc&utm_campaign=apmacroeconomics

AP Macroeconomics on Khan Academy: Welcome to Economics! In this lesson we'll define Economic and introduce some of the fundamental tools and perspectives economists use to understand the world around us!

Khan Academy is a nonprofit organization with the mission of providing a free, world-class education for anyone, anywhere. We offer quizzes, questions, instructional videos, and articles on a range of academic subjects, including math, biology, chemistry, physics, history, economics, finance, grammar, preschool learning, and more. We provide teachers with tools and data so they can help their students develop the skills, habits, and mindsets for success in school and beyond. Khan Academy has been translated into dozens of languages, and 15 million people around the globe learn on Khan Academy every month. As a 501(c)(3) nonprofit organization, we would love your help! Donate or volunteer today!

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Adam Green

This video is wrong. Banks don't lend reserves. Do more research on the modern monetary system. The "money multiplier" that other commenters mention is a myth.


Isn’t this what Bernie madoff did? ?

Jeremy Dippel

You should do a video on the money multiplier!


In reality its not exactly like that and real multiplicator is slightly different.

David McCracken


Max Streese

Hi, unfortunately what is explained in this video is to my knowledge factually incorrect.

This video presents the "deposits create loans" misconception where commercial banks lend out some fraction of deposits from customers to other customers. The reality however is that commercial banks create money via loans. Therefore loans create deposits. The reserves on which requirements are put refer to a different quantity.

Please do not take my word for it but the word of an authority, namely the Bank of England which states this fact as well as the misconception in two articles as well as a video, all of which can be found here: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

Adam Zanetti

Wouldn't the $1000 be the 10%, and the first bank can loan out $10,000 instead of $900?

My Channel

My understanding is that the value of a country's currency is is entirely based on the ability (power) of that country's government to collect taxes (which are payable using said currency). But since countries are so deep in debt, we will never see significant cuts in taxes.

Bilgisayar Terbiyecisi

When you deposit $1000 in a bank, you take it out of the system and when the bank lends out $900 of your money, they put it back into the system. Regular banks cannot create money. If they could, it would result in hyperinflation very quickly.

Xavier Perez

Brb gonna start a bank.

Dennis de Ruiter

The fed dasnt create money but bankreserves

Faisal M

Thats why Islam prohibits interest at a Religion level, you are against Lord if you take interest. And i can assure you only this love of interest will bring American Empire down. No one can win against the commands of Allah.

Amour Paris

If someone said it was a way to make money and all I had to do was give a $100 fee and the bank that they work with will send 3,000 to build their company by transactions would that be a smart move

Claymagic 101

Will the Khan Academy website/app have a whole section dedicated to english?

Kofi Boakye Amoa

I have been waiting for long..thanks much

azim mustafa

Wait a second. That doesnt mean new money is created. If after loaning 900 dollars, the person who deposits in Bank A wants to take all of his 1000 dollars. Surely bank couldnt do that. And why is 900 dollars loaned an asset when in fact there is no cash hence bank is unable to give the whole 1000 dollars to the person who initially deposited.

ThunderBird {*V*}「Video Stuff」's-Eye Frame View

Every banknote is a interest-bearing promissory note.
When money is created, interest rates are not created.
We are all modern debt slaves.


I can explain it better and in only two words... ponze scheme.


So when people deposit currency they are creating inflation.

Magnum Research

I've always been the Reading writing comprehension and spelling girl I've been horrible math all my life! This was simple and I am in awe! Thank you for this I appreciate you brother

Last Flowers

Bring back the gold standard and make the reserve requirement 100 percent. This ponzi scheme masquerading as accounting finesse is destroying our future.

osthir bangladesh

I don't understand ?

Gang Stalking

Thank you for all the videos

Luiz Stefanuto

This is completely wrong. Money is not created this way in a modern economy.


Audit the Federal Reserve! #auditTheFed


effin pyramid squeme

Roberto Suárez

One form to look at it is that in creating interest you create value. The value of putting instant capability in the hands of someone. That requieres an amount of effort and investment. Therefore the amplifying factor.
Now, is it a perfect market? No it's not. No person can really compare the rate of interest between banks beyond the rate itself.
It requieres of the government to be regulated.


A question!
Lets assume that a bank has zero asset and borrows 100$ from central bank, can it lend 900$ to the guy in the example? So, as in the example, the Bank A's asset is, now, 100+900, but liabilities is 100$, is it correct?
So Bank A pays interests (at discount rate) to central bank on 100$ and receives interest paid on the loan of 900$ from the guy at the market interest rate r. Is it correct? (Also, r>discount rate).

Jonathan Smith

Now I want to build a word bank in heaven so I can cash in on the words spoken in blessings and cursing for and against thoes who don't believe truth over opinions. Praise God for because He keeps His word He is about to leave this land of America since the people keep on pushing Him out of everything!!! Wow. This is factually correct but it not how real world people do business.

v Bremont

The problem of all currencies is that they are national/ a new global
reserve currency is unavoidable / to make all nations on equal terms/
a king transaction currency can keep all nations at peace "since
wars exist on money" arms and the industrial military complex/
evolution on the economical realm have to accept a new king currency
to be able to subsist/ the new global currency can restrain wars &
exploitation, have master & slave distinguishes by values not a
national currency / central individual banks remain however look over
the global reserve currency/ as a name I recommend the BREN is as
well a mythological name & merges with the numerous brand names
of BANKS & organizations. The king currency keeps the central banks & private & public banks incheck/ the national currency remains same as euro & dollar

however the dollar is no longer the global reserve currency. The king
currency determines the value of the dollar as well the other world
currencies in balance. Good-hearted an Economical Magna Carta/ it
prevents nations investments on arms races and toxic industries.
Since it is the the King currency that determines the value of each
nations currency. FOOD is a lot cheaper that weapons, nations that
buy weapons their currency diminished, while nations that buy food
and health their currency increases in exchange value. HAVING a
Magna Carta for the web, allows transparency from the kings currency
& the nations of the planet.

Pat Low

Every explanation of fractional banking I have come across say with a reserve requirement of 10%, a $1,000 money created by Fed results in $10,000 creation by banks. This is wrong. Theoretically, fractional banking to infinity results in $1,000 in banks reserves and $9,000 in customer deposit accounts. As bank reserves are Fed Funds, the $1,000 is not included in M1. Thus a $1,000 money creation by the Fed results in increasing money supply by $9,000 if the reserve requirement is 10%.

Hoàng Kim Việt

This video helps me understand more about money :0

Ultima Thule

To the Author: you have fooled 57,763 people (as of 20.01.2021). You have no idea about finances and accounting and you do not understand the logic behind the "T" account.

This is an example:
let's imagine a person A posses 1 chair. A lends the chair to B.

A posses Receivables of 1 chair
B posses 1 chair.

My question:
How many chairs there are now ?

According to your "logic": 2
According to logic: 1

Do you understand your mistake? Or not yet ?


And if the banks are to apply a %10 interst rate on nay loans they give out, then that $1000 becomes $20,000. Please correct me if I'm wrong.

James Armstrong

Fractional reserve banking does not really create money. Instead, it increases the availability of money as it is not left sitting in a vault. For example, as the fractional reserve requirement for a bank decreases from for example 10% to 5%, there would be more of the deposit to loan. However, if the fractional reserve requirement approached zero, according to this analysis the amount of money in the economy would approach infinity.

Clearly that is not the case. If someone loans a dollar to a friend who loans it to someone else, and let us say this goes on a million times, we don't have an extra million dollars in the economy. It's just a bunch of people who owe someone the one dollar that exists.

In the United States money is created by the Federal Reserve. They are the only ones who have the legal right to bring money into existance. Excessive creation of money, in excess of a compensatory increase in the goods and services of that society (the USA in this case) is the only cause of sustained long-term inflation.

There is no rule that the government must increase the monetary supply. In fact, if they stopped doing this, there would be a deflationary pressure on the dollar. This means the cost of items would decrease and the money citizens saved in the bank would actually increase in purchasing power over time. This would certainly be a favorable change from the constant excessive money production which causes inflation over time.

This is an important aspect of economics to understand. The fractional reserve system does not create money.

Kaushik Sharma

Rothschild found this type of banking system.

Phil Dennis

amazing explanation


Guess you can explain QE next... Where are the missing trillions? Those two things would be great to do videos on...

Balasubramanian P

When loan is taken, banks get opportunity to create cash out of nothing. Increasing their assets in balance sheet without doing anything.

This is why they make buying things on credit even cheaper than buying through cash.

This is why banks spam the public continuously to take more and more loans.

Upon taking loan, banks will open a deposit account immediately for you ensuring cash creation in their own bank.

They don't care much about the interest payments on loans. Banks just want you to take loan. The moment you take loan they generate cash out of thin air.


The interest is a ponzi scheme.
The money to the interest isn't created when the loan and therefor the money is created.
That makes it a ponzi scheme, need new loans all the time to finance the old.

Solution is, remove interest and remove all current debt.
It should not be allowed to earn money on money. Everything else is fail and if you don't agree then im sorry, you're not woke enough, when enlightened enough you'd see that interest and earning money on the money is egoistic and will not serve for the masses and we will be were we are again.
With debtsaturation.

We the people should give out our own money, interest free. Its to make our tradings easyer. Not so a few banksters can be titans and just have cashflow from nothing.

If someone have money just siting and someone else needs money, they lend/borows interest free, the interest isnt an insurence for payback, interest is just a non-productive-load on the economy.
If the one who had money needs them again, then he borrows from another one and then hes out. (Just example how it would work instead)


endogenous money?

R. Vakish

Wait how did you get 0.9

Awang Daime

Please make a video on using debt formula, how debt can be use. Make a clear and easy understanding.


Thanks for this

Shyam P

Which is the app you are using as board...?

Carlos Rodriguez

Is time a factor?

Simple Concept Golf

OK, now i wanna build a bank :D

Kevin Rathgeber

In the case of a mortgage loan, I guess the $900 would go to the seller of the home rather than the borrowers checking account, right? Then the seller would deposit into a bank and then the cycle would continue on from there.


Terrible system.

top form

Correct. However, people do not utilize the full proceeds of loans to open other checking accounts. Much of the value of the loans are employed such that the returns will generate not only enough money to repay the interest on the loans but also will generate profits.


So what happens when the reserve requirement is $0. Like now..