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Article:
How Banks Create Money by: Tanner Larsson Did you know that banks can 'create' money? The vast majority of people have only the vaguest idea of how banks and financial institutions in general, operate. They just go about their lives never understanding what happens every time they deposit money into their bank. I guarantee you if they did know what went on behind the scenes, they would demand much more than the pitiful, if any, interest rates they are getting now. Now I'm going to give you a behind the scenes look at how banks create money. Currently when banks receive a sum of money, they are able to lend out ten times that amount. That's right for every $1 that comes into the bank, they can lend out $10.This is called the money multiplier and it is based on the required reserve ratio. The required reserve ratio is the percentage of the total deposits the bank recieves that must be held in reserve and cannot be lent out. The required reserve ratio is determined by the Federal Reserve Bank (FRB). Whatever is left over after the reserve has been met can be lent out. To figure out the current money multiplier, use the following formula: 1 / Required Reserve Ratio = Money Multiplier Below you will find a basic example of how banks create money, in this example the Federal Reserve Requirement is 10%. That means that the money multiplier is '10
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