Did you know that when you deposit $1,000, the bank doesn’t just keep it in a vault? Through Fractional Reserve Banking, banks only hold a small percentage of your deposits and lend out the rest. This cycle of lending and borrowing creates a multiplier effect, meaning your money is currently tied up in someone else’s mortgage, car loan, or business.
While this keeps the economy moving, it also means if everyone tried to withdraw their cash at once, we’d face a bank run. Understanding how the financial system works is the first step to financial literacy.
Fractional Reserve Banking Banking System How Banks Work Money Creation Financial Crisis Bank Run Multiplier Effect Lending and Deposits
