Another way banks ‘make’ money is through the fractional
reserve. This is a percentage set by the Fed which determines how much of a
deposit banks must hold in ‘reserve.’ Right now the reserve is 10 %. This means
that if you deposit $100 in your account, the bank must hold on to $10. It can
do what it wants with the remaining $90, like bet it on the stock market, or
lend it to someone else at interest.
Through the factional reserve, money is multiplied. It works like this.
Say you deposit $100 in your account and your bank decides to lend $90 to Ann.
When she deposits the $90 in her bank, that bank must keep $9, and can lend $81
to Mary. Now, Mary has $81, Ann has $90, and you have $100. In this
manner, your initial deposit can be multiplied ten-fold ($100+$91+72.90 … = $1000).
This is how money is created out of thin air and how banks have become so
profitable.
