Banks are fantastic wealth-creation machines. Here’s how it works:

• I create the Bank of Elaine with zero assets.
• Foodstamp Fred shows up and asks for a $100 loan.
• The bank creates an account for Fred with a $100 deposit. The bank now has $100 worth of assets in the form of a loan.
• Banks have a 10% capital requirement for loans, so I sell some shares of the bank for $10.
• Fred would like to withdraw his $100 deposit in small unmarked bills.
• Bank of Elaine doesn’t have $100, so it borrows the money from another bank. Actually, ElaineBank borrows $300, using this $100 loan asset as collateral.

And that is how wealth is created.

See Also:
Basics of Banking: Loans Create a Lot More Than Deposits –CNBC