deposit creation~

Under central banking with mandatory minimum reserve ratios for commercial banks, where the reserves must be central bank banknotes or balances with the central bank, the central bank can control the stock of money by controlling its own issues and the mandatory minimum reserve ratio.
The most common mechanism used to generate money is typically called the money multiplier. It measures the amount by which the commercial banking system increases the money supply. To control the amount of money created by the system, central banks place reserve ratios on the commercial banks which set the proportion of primary deposits the banks must hold as qualifying reserves.
In this example, an initial deposit of $1,000 is lent out 10 times at a fractional reserve rate of 20%. In an attempt to simplify an explantion of how it works, a different bank is used for each deposit. In the real world, sometimes when a bank gives out a loan, that same money ends up right back in the same bank so it then has more money to lend out.




Table 1: $1,000 of actual money loaned out 10 times with a 20 percent reserve rate

Individual Bank
amount deposited at bank
amount loaned out
amount left in bank (reserves)

A
$1,000.00
$800.00
$200.00

B
$800.00
$640.00
$160.00

C
$640.00
$512.00
$128.00

D
$512.00
$409.60
$102.40

E
$409.60
$327.68
$81.92

F
$327.68
$262.14
$65.54

G
$262.14
$209.72
$52.43

H
$209.72
$167.77
$41.94

I
$167.77
$134.22
$33.55

J
$134.22
$107.37
$26.84

K
$107.37






total reserves:




$892.63


total deposits:
total amount loaned out:
total reserves + last amount deposited


$4,570.50
$3,570.50
$1,000.00
Notice how no new money was physically created. Only the $1,000 from the initial deposit was used. New money is created virtually through loans. The 2 boxes marked in red show where the original $1,000 is throughout the entire process. The total reserves plus the last deposit will always equal the original amount, which in this case is $1,000. As this process continues, more new money is created.