How Do Banks Create Money from Nothing? The Basics of the Economic Crisis in 5 Minutes

The economic crisis is the result of flawed banking rules. In 5 minutes, learn the basics of how banks operate and why the rules must change.

The rules of banking allow banks to lend out 90% or more of the money of depositors under a system known as “fractional reserve banking”. This leads to the majority of all deposits in checking and savings accounts to be backed only by the promises of borrowers to pay back the loans on schedule and with interest. If the borrows are unwilling or unable to keep up their payments, the banks enter a state of crisis, and the deposits of all the savers are at risk.

In 5 minutes, review the basics of how banks “create” money from “nothing” by lending out money based on promises of future repayment. If the borrowers fail to repay, and if the collatoral backing the promises is insufficient, then crisis results. This is a key component of the current economic crisis, which led to bailouts, financial crisis, tightened lending standards, job losses, and a recession that some believe will continue indefinitely.

(Note: This is a 5-minute revision of a 10-minute video covering the same concepts. The 10-minute video goes through each step in more detail, bringing in more basics, and created with a school-aged audience in mind.)