Banks issue much more money than they have in reserve. However, the central banks play a central role in developing the illusion that all is well.
Money used to be the overall sum of goods and services put together, remember. How does more and more money come to represent the same amount of goods and services then? Well, because at the heart of the problem is the allowance of fractional-lending, where banks can lend much more than what they have in reserve. This reserve is not the reserve in their own bank but the reserve they maintain in the Central Bank of the land they operate in.
Banks are required to make an initial deposit to the central bank when they start operations. Lets say $1000. By the allowance of fractional-lending, the bank can now loan a maximum of $10000 to someone (the maximum ratio being 10:1). Lets say Adam gets that loan. Adam buys a car from Ann for $10,000 and Ann goes off and deposits this in another bank. Yes, the new bank has $10,000 now. But (and thankfully) the new bank cannot apply fractional-lending on this sum. It cannot give a loan of $100,000 based on this $10,000. In fact, the deposit of $10,000 is ‘divided’ by the fractional-lending ratio and reduced to two parts – $909 and $9090 (the sum coming to $10,000). The balance-sheet for the new bank will show the complete $10,000, but it can loan money only over the $909 dollars now. The next maximum loan is, hence $9090. This is an important step. To take a step back, in the first loan, $1000 was inflated to $10,000 but as soon as it was deposited, it was deflated back to $909 for the purposes of providing loans. In-spite of this ‘deflation’, each bank will earn interests on each successive loan, even if it is of a slightly lesser amount (first $10,000, then $9090 and so on). If this series keeps going on, and we add the maximum successive loans, they add up to $100,000!
There are two take-aways. The first is that fractional lending allows banks overall to earn interests on loans of money that is 100 times that is deposited in the central reserve. Also, that the money in circulation is 10 times what is deposited with the central reserve.
Hence, go open a bank. And remember that a new car is really worth just 1/10th.