Welcome to Universal Wealth Creation.com

This site have been developed as a resource for people

searching for the best ways to create wealth and increase the

quality of their lives. Inside you will find reviews of the latest

Investment strategies available.

Wealth Creation

Home Page

FINANCE SITES

AFR
AFR BOSS

AFR Photos

Asset

BRW

CFO

Fairfax Photos

Fairfax Research

Leverage

MIS

MoneyManager

Personal Investor

Shares

Tradingroom

Business & Finance Articles

HOW BANKS CREATE MONEY
By: Tanner Larsson

Copyright © Tanner Larsson
Http://www.Work-At-Home-Resource-Center.com

Did you know that banks can “create” money?

The vast majority of people have only the vaguest idea of how banks and financial institutions in general, operate. They just go about their lives never understanding what happens every time they deposit money into their bank.

I guarantee you if they did know what went on behind the scenes, they would demand much more than the pitiful, if any, interest rates they are getting now.

Now I’m going to give you a behind the scenes look at how banks create money.

Currently when banks receive a sum of money, they are able to lend out ten times that amount. That’s right for every $1 that comes into the bank, they can lend out $10.This is called the money multiplier and it is based on the required reserve ratio.

The required reserve ratio is the percentage of the total deposits the bank recieves that must be held in reserve and cannot be lent out. The required reserve ratio is determined by the Federal Reserve Bank (FRB). Whatever is left over after the reserve has been met can be lent out.

To figure out the current money multiplier, use the following formula:

1 / Required Reserve Ratio = Money Multiplier

Below you will find a basic example of how banks create money, in this example the Federal Reserve Requirement is 10%. That means that the money multiplier is 10, so the banks can lend out $10 for every dollar they receive.

---- Begin Example ----
John deposits $10,000 into his checking account at Bank A.

Bank A
Deposit: $10,000
Reserve (10%): $1,000
Lendable Amount: $9,000

Mary borrows $9,000 from Bank A and buys a car. The car dealer then deposits $9,000 into their account at Bank B.

Bank B
Deposit: $9,000
Reserve (10%): $900
Lendable Amount: $8,100

Mark borrows $8,100 from Bank B and has surgery. The doctor then deposits $8,100 into his account at Bank C.

Bank C
Deposit: $8,100
Reserve (10%): $810
Lendable Amount: $7,290

Sue borrows $7,290 and shops at Versace. Versace then deposits $7,290 into their account at Bank D.

Bank D
Deposit: $7,290
Reserve (10%): $729
Lendable Amount: $6,561

Kim borrows $6,561 from Bank D and pays off her credit card, the Credit Card Company then deposits $6,561 into their account at Bank E.

Bank E
Deposit: $6,561
Reserve (10%): $656.10
Lendable Amount: $5,904.90

And so on through the system. When M1* is measured, and the FRB totals the checking account balances in the entire system, the original $10,000 deposit will have created a total of $100,000 in deposits system wide.

*M1 = First level of money supply = All currency held by the public.
---- End Example ----

That in its simplest form is how the banks create money. Now considering how much money the banks are making off of every dollar you deposit, does the 0.01% or 0.25% interest rate you’re getting paid seem fair?

Not to me, but because the general public is uninformed of this fact of life, the banks and other financial institutions will continue to reap extraordinary profits from practically imaginary money.

About the author:
Tanner Larsson is a veteran entrepreneur and the publisher of the award winning Work At Home Success Newsletter. Subscribe to his newsletter and recieve 4 EXCLUSIVE Bonuses valued at $276.
http://www.work-at-home-resource-center.com

Circulated by Article Emporium

http://www.universalwealthcreation.com Wealth Creation | Financial Wealth

Copying or republishing this article is permitted with this footer included

Collect a Free 260 page ebook here: Universal Wealth Earn up to $1,000 per referral: Wealth Creation Affiliate

These property, finance, stock market & business articles have been supplied in the interest of Universal Wealth Creations visitors who want to expand their knowledge in the wealth creation & investment fields. All the business, finance, stock market & business articles have not been read as they are submitted remotely, so if you find any questionable facts in here or simply do not like it, please email webmaster@universalwealthcreation.com and we will review the material. As we find time to do so, we will go through all articles and remove any that appear not suitable. Other sites we recommend here at Universal Wealth Creation are: 21st Century Academy with Jamie McIntyre, Investor Finance, Universal Trading Solutions which promotes great wealth creators like: Kim Reilly, Simon Martin, Justin Beeton, Louise Bedford, John Kaye, Daniel Kertcher & more. They run great seminars across the country. At times we will publish dates for these seminars as they are made available around the counrty. Meanwhile, there is a great opportunity to learn about the finance, stock market & property investment field through reading these kind of articles. Learn about share trading, options, futures, CFD's, derivatives, warrants, indices & more in the stock market. You will also learn plenty about business, finance & property investing through authors opinions in the marketplace. Enjoy your journey towards financial freedom. We hope you will enjoy your visit.

Regards Sean Rasmussen - Universal Wealth Creation Pty Ltd

Site Map

Return to Index
Return To Universal Wealth Creation Home Page

Business & Finance articles