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How banks increase the supply of money
Banks collect money from savers and lend it to borrowers. Through this intermediary role the banks create new money. Banks are therefore "money creators". A simple example will show how this works. Let us assume that a saver pays 20,000 francs in notes into his account with the bank. The amount of money in the economy does not change as a result of this deposit. Although the notes are no longer in circulation but in the bank's strongroom, the saver's account has been credited with 20,000 francs.
Letting the money lie idle in the strongroom will not earn the bank anything. So why not lend someone the money in return for being paid interest? A businessman needs money for computer equipment. Out of the 20,000 francs that the saver has paid in, the bank lends the businessman 16,000 francs and credits his account with this amount. Has the money supply changed as a result of this transaction? The saver still has 20,000 francs on his account. The businessman, as a borrower, now has 16,000 francs. The money supply has therefore increased by 16,000 francs. If the businessman now uses the 16,000 francs to buy computers and the computer dealer pays the cash sum that he has received into his bank account, the latter will in turn lend someone else part of that sum. This once again leads to an increase in the money supply; and so money creation goes on.
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Banks can create money by holding a portion of the money paid in by customers in reserve while handing out the rest as loans.
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