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I originally pulled the following simplified explanation of fractional reserve banking off of the website of the Federal Reserve Bank of New York, but it has been pulled down since then. Rather, the U.S. Government creates a bunch of U.S. Treasury bonds (debt) and takes them over to the Federal Reserve. The Federal Reserve creates a billion dollars out of thin air and exchanges them for the U.S. If the borrower then writes a check to someone who deposits the 90, the bank receiving that deposit can lend out 81. As the process continues, the banking system can expand the initial deposit of 100 into a maximum of 1,000 of money (100908172.901,000). But that never actually happens, does it? And the creators of the Federal Reserve understood this as well. They understood that the U.S. Government would not have enough money to both run the government and service the national debt. Because the U.S. Government must pay interest on the Treasury bonds, the amount of debt that has been created by this transaction is greater than the amount of money that has been created.
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