Briefly explain banks create money by giving loans.

Briefly explain banks create money by giving loans. 

Ans. When banks give loans they add to chequeable deposits. When banks give loans, they do not give loans in the form of cash. They open an account in the name of borrower. It is known by experience to the bank that borrower will make use of cheques and other paper documents to make payments and therefore, they need not hold cash for them. They keep only 10% of deposits as cash reserves. This implies that they can give a loan of 1,00,000 from a deposit of10,000.