There is a long perpetuated myth that fractional reserve banking creates money. This is false. FRB increases the velocity of money. Before getting into the specifics of why fractional reserve banking does not create money, and how it works to increase the velocity of money, it might be reasonable to discuss what fractional reserve banking is.

In fractional reserve banking, a bank lends out part of the money it takes in. When taking into account how much is lent out, along with how much is supposedly in each person’s account, it appears that new money has been made. This can happen multiple times, as people continue to deposit money into different bank accounts and different banks. The appearance of more money is called the money multiplier. But there are issues with the idea.« Continue »