How Commercial Banks Really Create Money the Money Multiplier is a MYTH .
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This video explains why fractional reserve banking and the money multiplier theory are myths and how banks do, in fact, create money.
Yes, banks create money through credit creation, but they do not do so by getting cash from you and then lending over and over till they reach the reserve requirement limit, as the money multiplier theory suggests. The reserve requirement is not a hard limit on money creation because central banks create new reserves to support healthy but cash-strained banks. This is evident since, even though banks can technically create money, they can still fail because they do have to pay back that money. There are three other important soft limits on bank money creation. These are the public's demand for debt, capital requirements, and liquidity concerns.
Yes, banks create money through credit creation, but they do not do so by getting cash from you and then lending over and over till they reach the reserve requirement limit, as the money multiplier theory suggests. The reserve requirement is not a hard limit on money creation because central banks create new reserves to support healthy but cash-strained banks. This is evident since, even though banks can technically create money, they can still fail because they do have to pay back that money. There are three other important soft limits on bank money creation. These are the public's demand for debt, capital requirements, and liquidity concerns.