To be able to get ahead of the curve and take smarter financial choices, it’s necessary to understand how our current financial system works. The fractional reserve system (see Fractional-reserve banking) that was established by the Swedish central bank in the late 1600s is a system that lets banks create money “out of thin air.” The golden rule is the 9 to 1 ratio: banks only need to hold 1 part of the money while they can supply 9 parts (~11% is held as a reserve).
As an example:
If you deposit 100 USD in a bank account, that bank can lend out 90 USD. If the borrower deposit the same amount in another bank account, the bank can lend out 81 USD on top of the 90 USD it has already lent. This process will continue until the bank has lent out 900 USD based on the original deposit of 100 USD. The bank only holds 100 USD but has created 800 USD out of thin air.