Banks serve another very important purpose involving the creation of money. To begin, let's go to a simplified world where banks only serve as a safe place to store money. They do not make loans and do not pay interest. Also, let's say that the money supply is only $1000. In this case, if a bank held $100 in deposits, the money supply would simply be $900 since the $100 in the bank would no longer be in circulation. When the depositor withdrew the $100 deposit and spent it, the money supply would again increase to $1000. This system is called a 100\% reserve banking system because a bank holds 100% of all of the deposits made. In the real world though, banks are required to hold significantly less than 100% of the deposits in reserve. A bank can make loans, which are then redeposited, and can then be loaned out again; this, in essence, creates money. In this way, any banking system
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