[caylus]

> when you borrow $500,000 from the bank, the bank’s funds don’t go down by $500,000

While technically true, this is a bit misleading, because if you actually /do/ anything with the $500,000, that does in fact cause the bank's funds (i.e. reserves) to go down.

If you withdraw it in cash, then the bank will have to give you some of the Federal Reserve Notes it has in its vault, and when they request more from the Federal Reserve, their account there will be debited $500,000.

Or if you send it to someone at a different bank, then to settle the transaction your bank's balance at the Federal Reserve (or another intermediary bank) will go down by $500,000, and the other bank's will go up. This tends to average out if both banks are receiving deposits and making loans at equal rates, but if they become imbalanced the bank is at risk of its reserves falling below the requirements, which it must remedy or risk bankruptcy.

You're right that low interest rates make it easier for banks to create money, though, because one option a bank has to remedy low reserves is to borrow them from another bank at an interest rate that the Federal Reserve can influence.

[nonfamous]

>> If you withdraw it in cash, then the bank will have to give you some of the Federal Reserve Notes it has in its vault

And while that is indeed technically true, it only applies to money withdrawn as banknotes. Given that most of the economy is electronic transactions, that loan is to all extents and purposes real money created by the bank out of thin air (modulo capital requirements to back debt).

[caylus]

I address electronic transfers in the next paragraph. Even if initially transferred only within the bank, it is likely to eventually be transferred to another bank, which requires the bank to transfer corresponding reserves to that other bank.

Only the Federal Reserve can create truly unlimited amounts of money without the risk that customers might request transfers that exhaust their reserves.

Complying with reserve requirements imposed by the Federal Reserve on banks help to mitigate this risk, but they are not the true restriction. Even if the reserve requirement was zero, banks would need to keep some reserves or they would be completely unable to fulfil requests to transfer funds to other banks. And even if a bank exceeded the reserve requirement, for example by keeping 50% reserves rather than 10%, they would be insolvent if customers requested 51% of balances transferred out and were unable to cover it with loans from other banks.