Where has all the money gone?
7th October 2008
A very entertaining explanation of fractional reserve banking and why it’s so fragile.
This illustration is a microcosm (with very conservative levels of lending) of what happened before the banking world stopped turning. In the same way that Bank A borrowed £1,000 from Mr P and turned it into £2,600 of spendable cash for the other people in the chain, so when banks borrow millions they turn it into many millions more of lending. Any snapshot of the amount of money in the world economy reflects not just the real money but also the additional money “created” by commercial lending.