Banks Multiply Money

                                            How Banks Multiply Money?

When We Save Money in a bank, we are basically lending our money to bank which then in turn uses it and pays us the interest for using it.

                            

                             What is the Rate of Interest the bank Pays us for using it?

The rate of interest that the bank pays us for using our money is 4-6 percent. The bank does not want us to save money because they have to pay us interest and therefore the rate of interest is low as bankers hate savers.

What The Bank does with our Money?

The banks gives loans at much higher rates of interest to the People With our money! The bankers loves those who takes loans because they get Interest on the money! Hence the bank use our money at much higher rate of interest.

Here Is Something That You Do Not Know!

Well what is the catch, everyone is aware of what i said above.

Here is the catch.

Suppose a person A Deposits Rs 100 in bank at 4 percent interest in his saving account, do you know that the bank, sooner or later uses Rs 95 From A's Money , to give away loans. Then How Come the Person A's Passbook always shows Rs 100 in his account? And say If bank uses Rs 95 from A's Rs 100, then how come bank is able to give back Rs 100 to A when A decides to withdraw the money?

This something called Fractional Reserve. When You Put money In Bank, the bank puts some numbers in your account and those numbers are basically nothing But IOU(I Owe You), a kind of promise that the bank owes you your money. The bank then uses your physical cash at much higher rate of interest. When You withdraw the money, the bank returns you your money from the fractional reserve held by the other depositors. If all the depositors together withdraw their money then the bank is said to have bank run as banks will not be able to give all the money back!

So bank has multiplied your money by issuing an IOU.

Well the process is complex and general people are not aware of the detailed facts.

So, When banks can use your money at higher rates of interest , Why can't you?

Possess the sound financial knowledge for the same.

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