How Banks Make Money
After this process has been repeated as many times as possible, that $1000 you originally deposited in your bank can actually be turned into as much as $10,000 in the overall money supply. You can calculate the $10,000 by dividing your initial $1,000 deposit by 10%.
In this way, the total money supply in the economy increases when banks make loans. But, when the money supply increases, the consequence is inflation. Fractional reserve banking leads to inflation.
What If There's a Run on the Banks?Because banks operate on slim reserve requirements, they would have an immediate and serious problem if their customers were to all demand their money back at the same time. This is what led to the thousands of bank failures during the Great Depression. In response to this crisis, the U.S. government created the FDIC in 1933, which insures the deposits in banks that purchase FDIC insurance.
The Birth of Fractional Reserve BankingSo how did fractional reserve banking come to be? To get the answer, we need to go all the way back to the 16th century and the time of the goldsmiths. Goldsmiths were the first bankers. Goldsmiths would store a person's gold and keep it safe for a fee. They would provide the owner of the stored gold a receipt to indicate the amount of gold they had stored. The owner of the gold could redeem his receipt for gold at any time. Eventually the receipts themselves were used as money rather than the gold itself.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV