You deposit $100 in a bank. You think it sits there safely, waiting for you. But your bank doesn’t keep it locked away like treasure. It lends most of it out—to someone else. And they deposit it in another bank, which lends it again.

Surprise: your $100 just multiplied.

This is fractional reserve banking—a system where banks are only required to keep a fraction of your money in reserve (say, 3%) and are free to lend the rest. That lending creates new money. Literally.

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Debt That Becomes “Money”

Let’s break it down:

You deposit $100.
The bank keeps $3 and lends $97 to Sally.
Sally spends that $97. Frank deposits it.
Frank’s bank keeps $2.91 and lends the rest.
And so on…

Every loan becomes someone else’s deposit. Every deposit becomes the base for another loan. Each cycle creates more “money” on paper—backed not by coins or cash, but by trust and IOUs.

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So… What Is Money?

Here's the twist: most of the “money” in the world isn’t real in the way you think.

Only a small percentage of money exists as physical cash.
The rest is just numbers on screens—created through lending.
It’s debt. IOUs. Belief.

This is why economists say “Money is a system of trust.” You believe your money’s there. So does everyone else. And as long as everyone believes, the system works.

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The Magic—and Risk—of Belief

Banks don’t actually have enough cash to give everyone their full balance all at once. If everyone tried to withdraw everything (a bank run), the illusion would collapse. That’s why central banks like the Federal Reserve promise to back deposits up to a certain limit.

Money isn’t a thing. It’s an agreement.

Fun Fact Box

In the U.S., over 90% of the money supply is digital—created not by printing presses, but by banks issuing loans.