Money multiplier

This is one of the key principles underpinning the entire banking system. That’s because it’s the basis of ‘credit creation’.

Imagine I walk into a bank with £100 and deposit it. The bank sets aside 10%, or £10, in case I need that back. It reckons I won’t ever ask for more than that, so it then lends out the rest – £90. Let’s then say the borrower spends the £90, and the person he gave it to puts it back in the bank. The bank then keeps 10% back, or £9, and lends the remaining £81.

This process can continue. The bank is using a single deposit of £100 to create a lot more credit. It works, provided all of its depositors do not simultaneously march into the bank and demand all of their money back – an unlikely event in practice. The lower the retention rate – here, 10% – the more credit the £100 generates.

• See Tim Bennett’s video tutorial: How banks create credit

MoneyWeek magazine

Latest issue:

Magazine cover
In the balance

How May 2015 could hit your pocket

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Russell Napier: deflation is coming – hold on to your cash

Financial historian Russell Napier talks to Merryn Somerset Webb about the next deflationary bust – why it's coming, what it means for you, and how you can survive it.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


27 November 1924: Macy's first Thanksgiving Day parade

On this day in 1924, New York department store Macy's held its first Thanksgiving Day parade. It would soon become a city institution, kicking off the run-up to Christmas.