<p>@EnergyNumbers has said the answer in the comments but I want to make it crystal clear what it means as I think this misconception of fractional reserve banking may be widespread.</p>

<p>First, banks can lend to other banks. There is no shell company involved unless for some other reason.</p>

<p>Second, banks can lend to other banks, which then can lend back to the original bank, which then can lend to other banks, etc. How long can this process go? Infinitely - assuming your currency can be infinitely divided.</p>

<p>Then an infinite amount of money is created, right? No. At each step in this process the amount lent out is decreased. If your reserve requirement is 20%, then you can only lend out 80% not 500%. The following is a table from <a href="https://en.wikipedia.org/wiki/Money_multiplier" rel="nofollow noreferrer">the Wikipedia page on the money multiplier</a> that illustrates this process:</p>

<p><a href="https://i.sstatic.net/tPJva.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/tPJva.png" alt="relending process without currency drain"></a></p>

<p>So at the end of the process, what is the maximum amount generated? The inverse of the reserve requirement: in other words, for a reserve requirement of 20%, it will be 5x. Note this is not 5x per step but 5x at the end of an infinite number of steps.</p>

CC BY-SA 4.0
2019-09-26T04:37:55.307Z
2019-09-26T04:37:55.307Z
Kent Shikama
<p><img src="https://i.sstatic.net/wMliD.png" alt="enter image description here"></p>

<p>Take the above example:</p>

<p>As you can see 357 is lent from 100. So the 357 can be paid back with the loan, because it never disappeared, resulting in 357% growth and no ending debt, so you can repeat infinitely.</p>

CC BY-SA 4.0
2019-09-26T16:51:14.383Z
Note that your answer is very similar to the answer already given. If you think there's something you might want to add, consider adding it as a comment instead :)
Art
CC BY-SA 4.0
2019-09-26T16:54:01.173Z
So Infinite exponential growth
Isa Wal
CC BY-SA 4.0
2019-09-26T16:55:47.380Z
Wait so you're saying that infinite amount of money could be created because you can do this infinitely many times?
Art
CC BY-SA 4.0
2019-09-26T17:10:08.647Z
Yeah I mean you might need to buy bonds or something, the leverage would be insane and you'd get a good return
Isa Wal
CC BY-SA 4.0
2019-09-26T16:41:56.823Z
2019-09-26T16:41:56.823Z
Isa Wal
<p>Bank A has $1.</p>

<p>Bank A creates $10 fractional reserve money and deposits into bank B.</p>

<p>Bank B now has $10.</p>

<p>Bank B creates $100 and deposits into bank A. Repeat</p>

<p>What stops banks from creating Infinite money?</p>

<p>"They can't lend $10 to another bank" Then can't they just use a shell company? Is that a real objection?</p>

CC BY-SA 4.0
2019-09-25T16:42:13.183Z
This is not how fractional reserve banking works.
zeta-band
CC BY-SA 4.0
2019-09-25T16:48:54.517Z
Someone deposits \$1m in a bank. The bank can now lend out less than \$1m. It has to keep some to meet capital requirements. See e.g. https://www.consilium.europa.eu/en/policies/banking-union/single-rulebook/capital-requirements/
410 gone
CC BY-SA 4.0
2019-09-25T17:02:12.197Z
This is why the "fraction" in fractional reserve banking, is set to a number higher than zero.
BKay
CC BY-SA 4.0
2019-09-25T20:25:21.183Z
You misunderstand your citation. Your theory means fractional reserve doesn't mean anything. The other bank can "pay back" the loan (using the loan) and $10 is created.
user24360
CC BY-SA 4.0
2019-09-26T04:20:25.143Z
That is not at all what @EnergyNumbers is saying, what he has said is correct. I think he understands his citation rather well
Brennan
CC BY-SA 4.0
2019-09-26T14:03:40.963Z
Here's how it works. Say the required reserve ratio = 0.1. Someone deposits \$1. The bank can lend out and "create" \$0.9. In the next round, the money created will be 0.9*0.9 = \$0.81, and so on. The *total* amount created is given by the arithmetic sum with r = 1-RRR which is equal to \$10. This is the total amount, not the amount each bank could "create."
Art
<monetary-policy>
What stops this from happening under fractional reserve currency
user24360
# What stops this from happening under fractional reserve currency

(Asked by: username_0 on 2019-09-25)

Bank A has $1.

Bank A creates $10 fractional reserve money and deposits into bank B.

Bank B now has $10.

Bank B creates $100 and deposits into bank A. Repeat

What stops banks from creating Infinite money?

"They can't lend $10 to another bank" Then can't they just use a shell company? Is that a real objection?

**Tags:** monetary-policy
> **Comments:**
> **username_1**: This is not how fractional reserve banking works.  
> **username_2**: Someone deposits \$1m in a bank. The bank can now lend out less than \$1m. It has to keep some to meet capital requirements. See e.g. https://www.consilium.europa.eu/en/policies/banking-union/single-rulebook/capital-requirements/  
> **username_3**: This is why the "fraction" in fractional reserve banking, is set to a number higher than zero.  
> **username_0**: You misunderstand your citation. Your theory means fractional reserve doesn't mean anything. The other bank can "pay back" the loan (using the loan) and $10 is created.  
> **username_4**: That is not at all what @EnergyNumbers is saying, what he has said is correct. I think he understands his citation rather well  
> **username_5**: Here's how it works. Say the required reserve ratio = 0.1. Someone deposits \$1. The bank can lend out and "create" \$0.9. In the next round, the money created will be 0.9*0.9 = \$0.81, and so on. The *total* amount created is given by the arithmetic sum with r = 1-RRR which is equal to \$10. This is the total amount, not the amount each bank could "create."  

---

## 2 answers

### Answer by username_6 on 2019-09-26. Score: 2

@EnergyNumbers has said the answer in the comments but I want to make it crystal clear what it means as I think this misconception of fractional reserve banking may be widespread.

First, banks can lend to other banks. There is no shell company involved unless for some other reason.

Second, banks can lend to other banks, which then can lend back to the original bank, which then can lend to other banks, etc. How long can this process go? Infinitely - assuming your currency can be infinitely divided.

Then an infinite amount of money is created, right? No. At each step in this process the amount lent out is decreased. If your reserve requirement is 20%, then you can only lend out 80% not 500%. The following is a table from [the Wikipedia page on the money multiplier](https://en.wikipedia.org/wiki/Money_multiplier) that illustrates this process:

[![relending process without currency drain](https://i.sstatic.net/tPJva.png)](https://i.sstatic.net/tPJva.png)

So at the end of the process, what is the maximum amount generated? The inverse of the reserve requirement: in other words, for a reserve requirement of 20%, it will be 5x. Note this is not 5x per step but 5x at the end of an infinite number of steps.


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### Answer by username_7 on 2019-09-26. Score: -1

![enter image description here](https://i.sstatic.net/wMliD.png)

Take the above example:

As you can see 357 is lent from 100. So the 357 can be paid back with the loan, because it never disappeared, resulting in 357% growth and no ending debt, so you can repeat infinitely.

> **Comments:**
> **username_5**: Note that your answer is very similar to the answer already given. If you think there's something you might want to add, consider adding it as a comment instead :)  
> **username_7**: So Infinite exponential growth  
> **username_5**: Wait so you're saying that infinite amount of money could be created because you can do this infinitely many times?  
> **username_7**: Yeah I mean you might need to buy bonds or something, the leverage would be insane and you'd get a good return  

---

