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The analogy would be that if your friend Bob asks you for a $1k loan, you could tell him "done, I am loaning you $1k and for now I am keeping it safe for you; just tell me when you need it". Now you have all the money you had before, and you friend "has" an extra $1k, so you have "created" money. If Bob then tells you hey, I need the $1k to give it to John, you say no worries, and you go to John and says hey, here is $1k from Bob, and for now I am keeping it safe for you; just tell me when you need it. And so on. If at some point John actually wants the $1k in cash then you actually give him the money, you cannot create it. Maybe at some point you have just $1k of real cash with you, other people owe you $9k, and yet other people have $10k of "created" money that you are keeping for them. If all of the latter want their money in cash, you are going to be in trouble. Same with a bank, if a lot of depositors want their money back, the bank has to give it out of its reserves, it cannot "create" it to give it to them, hence the phenomenon of "runs on the bank" (because at any given time, the sum of all depositor balances in a bank is a lot more than the actual reserves) and why we need a federal insurance program to protect depositors. |