[Cats_In_Love]

Referring to that 10% reserve requirement, understand that the is on DEPOSITs. The bank must retain 10% of it's deposits and can loan out 90% of it's deposits. When the bank makes a loan, that money becomes a deposit at another bank, for instance, the bank gives me a loan to purchase a car. That money goes to the person I have bought the car from and that person then deposits it in their bank. The bank they deposit it at could be the same bank I took my loan out from or it could be another bank. It depends on who I bought my car from. That deposit increases the total DEPOSITs at the bank where it is deposited. In the larger scheme of things, I am not the only person taking out loans and buying cars. So, in the greater scheme of things, while my borrowed money becomes a deposit in another bank, someone else borrowed money at another bank and deposited it at my bank. But a deposit is still a deposit, whether it is from a loan at the same bank or a loan from another bank. It doesn't matter. In theory, a bank could be getting all of the loans it makes back as deposits. That doesn't happen, though I question what happens when you buy a car from a Ford dealership and get a loan from Ford Financing. Regardless at no time has the bank ever made loans in excess of it's total deposits. The net result is that, through the magic of the money multiplier, because the banking systems deposits are increasing, iteratively, as loans become deposits, become loans, that 10% reserve requirement results in a money multiplier of 10. Every loan, because it is iteratively deposited back into the banking system, results in ten times as much money in deposits as there are in loans. So, lets see how that works. Bank 1 has $10 and loans out $9. (We will ignore where that initial $10 comes from for now). That $9 is deposited into bank 2 and now Bank 2 can loan out .9 * $9 or $8.10. That gets deposited into bank 3 that can now loan out .9*$8.1. If I remember my math from my economics studies, that becomes $100 in loans when all the bank loans are added up. $10 in an initial deposit becomes $100 in the money supply. But this does not mean that each individual bank is leveraged 9:1. No bank has loaned out 10 times it's deposits. It always has more deposits on account than it has outstanding loans. And keep in mind, it's loans are an asset. Deposits are a liability. Someone owes money to the bank when it makes a loan. The bank owes money to someone else, when they make a deposit. Because it has 10% of deposits on reserve, it always has 10% more assets than liabilities. Now, I don't know what you mean by "leveraged" 9:1, but if you mean that it has more liabilities than assets, this is not correct. If you are thinking that deposits are assets, then while I do get what you are thinking, they aren't. The deposits don't belong to the bank. It doesn't own that money. It has it on account, but it doesn't own it. Someone loans the bank money, the bank loans out the money it borrowed. It pays .01% on deposits, it charges 10% on it's loans.

Do, by all means, double check this. It's been quite a while since my studies so I had to work this out on the fly. I am generally more comfortable researching what I think I know then going over it again, and again, and again...... But I'm pretty sure that's right. It's in that deposits are liabilities and loans are assets things where, in working it through, I got that "oh!" moment.

It is an interesting thing, though. Because if you unwound all the deposits and all the loans in the economy, there would be no money in the money supply. All of it is dependent on loans and the money supply grows in response to the economy increasing. As the economy increases, there is a demand for more money. That demand results in more loans that results in an ever increasing supply of money.

It still weirds me out. But then, I do engineering, not money.