🤔 Guiding Question for This Lab
"If banks can multiply your deposit into many loans,
how fragile does that make your savings?"
The Money Multiplication Process
When you deposit money in a bank, something remarkable happens: your money doesn't just sit there. The bank uses it to create new money through lending.
This process is called fractional reserve banking, and it's how most money in the economy is actually created — not by printing presses, but by commercial banks making loans.
Interactive Demo: How Banks Multiply Money
Follow one $100 deposit through the fractional reserve system and watch money multiply
Scene 1: Where Does Money Come From?
Let's follow one simple deposit through the banking system.
You walk into a bank and deposit $100.
💭 The bank keeps some of it in reserve and lends out the rest.
Question:
"If the bank just lent out $90 of your deposit, how much money exists now — $100 or $190?"
Scene 2: The Chain Reaction
The $90 loan is spent and redeposited into another bank.
That bank keeps 10% ($9) and lends out $81.
Click "Start Chain Reaction" to see money multiply
Money Multiplication Result
| Reserve Ratio | Total Money Created | Money Multiplier |
|---|---|---|
| 10% | $1,000 | ×10 |
| 5% | $2,000 | ×20 |
| 0% | Infinite | 💥 System collapse |
Socratic Reflection:
"If your $100 deposit can multiply into $1,000 of loans, who really creates money — the government or private banks?"
Hint: Over 90% of the money supply comes from commercial bank lending, not from printing presses.
💥 Scene 3: The Risk
This system works only if everyone doesn't ask for their money at once.
Key Insight:
Fractional-reserve banking turns deposits into promises backed by confidence.
When too many people withdraw at once, confidence breaks — and so does the system.
Next, you'll discover what happens when money no longer depends on confidence.
Ready to continue your journey?
← Return to Module 2