Money Multiplier

The money multiplier is the ratio describing how much broad money the banking system can create from each unit of base money under fractional reserve banking. In the textbook model it equals one divided by the reserve requirement: a 10 percent requirement implies each dollar of reserves can support up to 10 dollars of deposits.

Why it matters

The multiplier explains why most money in circulation is created by commercial bank lending rather than by central banks directly. When a bank makes a loan, it credits the borrower's account with new deposit money. The textbook version overstates the mechanics, and many economists note that in practice banks lend first and find reserves afterward. The Federal Reserve eliminated reserve requirements entirely in March 2020, leaving capital and liquidity rules as the binding constraints on money creation.

In the gold vs bitcoin debate

Fractional reserve banking historically grew on top of gold: goldsmiths issued more paper claims than metal held, effectively multiplying the money supply beyond the gold base. The same pressure exists in bitcoin markets wherever custodians hold coins for clients and paper claims trade in place of the asset. Whether bitcoin's easy self-custody and auditability can resist the multiplication that eroded gold's monetary role is one of the sharper open questions in the debate.