New 3 Minute Macro – Why Do Banks Need Deposits?

I often talk about the importance of understanding banking and the relationship between inside money and outside money. And a common theme in this topic is that the money multiplier concept isn’t quite right. In fact, the textbook treatment of this direct causal relationship is completely wrong. But if the money multiplier is a myth and banks don’t multiply their reserves and deposits then why do banks even need deposits? This new video answers one of the most common questions when learning that the money multiplier is a myth. In short, banks “multiply” deposits by earning a profit from them in various ways. But yhey don’t take in reserves or deposits and lend them out $ for $ in a textbook multiplier manner.

If you like this series please leave a comment and let me know what you’d like to learn about in the future videos. I’ll feature your recommendation. And if you want to access the full playlist in the Understanding Money section please see it here. We’re up to 8 videos jammed with just 24 minutes of learning.