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Your Money Is Not Actually In The Bank, Nor Is It Your Money
If you were to ask a kid how banking works, they would paint you a picture that’s quite different from reality. What a kid would imagine is that everyone puts their money in the bank, and all that money is held at the bank. In reality, this is not how it works.
The reality is that only part of the money deposited at a bank is held there. The rest is loaned out. Most of the money is loaned out.
You might have noticed that (under this system) if everyone went to the bank to get their money, there wouldn’t be enough money to give everyone.
To get a better sense of what’s going on, a visual will help. Below is how the process works:
Fraud
This is known as fractional-reserve banking, as opposed to full reserve banking. Is it fraudulent? Well, there are certainly a lot of people who don’t know this is how our banking system works. And if all of these people were informed of how the banking system actually operates, surely many of them would be nervous.
We are sold the idea that your money in the bank is yours, AND you can retrieve it at any time. Yet, you can’t retrieve it whenever you please. For example, you couldn’t get your money if everyone went to the bank to get their money at the same time; this means that it’s not really my money. And bank runs aren’t just hypothetical either because they’re quite common.
