Where does money come from? Fractional Reserve Lending Explained

What Is Fractional Reserve Banking?

Fractional reserve banking is a system in which only a fraction of bank deposits are required to be available for withdrawal. Banks only need to keep a specific amount of cash on hand and can create loans from the money you deposit. Fractional reserves work to expand the economy by freeing capital for lending. Today, most economies' financial systems use fractional reserve banking.

The fractional reserve banking process creates money that is inserted into the economy. When you deposit that $2,000, your bank might lend 90% of it to other customers, along with 90% from five other customers' accounts. This creates enough capital to finance $9,000 in loans.
Your balance still reflects $2,000, and the customers that the bank borrowed from also see their balances remain unchanged. If all five customers have account balances of $2,000, it will look something like this:
You and four other customers have $2,000 each, deposited in savings accounts that pay 1% per year.
If the bank can use 90% of its deposits for loans, the available capital is $9,000 (90% of $10,000).
A sixth customer asks for a loan of $1,000.
The bank borrows 10% from each of the five accounts, totaling $1,000.
There is still a balance of $2,000 in each account ($10,000 total between the five accounts).
The bank essentially created $1,000 and lent it to the borrower at 5% per year.
You receive interest payments of 1% per year on your $2,000, and the bank pockets the difference of 4% as profit.

When you create an account at a bank, in the contract, you agree to allow that bank to use a percentage of your deposits as loans to other bank customers. This doesn't mean you don't have access to the money you deposited; it only means that if you want to remove more than the percentage a bank keeps on hand, such as the entire balance, from the account, the bank will need to access funds from somewhere else to give you your balance.

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