From an initial deposit base of cash, banks were able to expand the money supply many times over through lending provided depositors were confident about the security of their deposits. The practice involved risk, but it also involved profit. The money advanced to borrowers when drawn upon, becomes deposits elsewhere in the financial system when those who receive payment for production or services bank their receipts. The system has some distinct advantages. The banks make a profit on the margin between what they earn on loans and what they are obliged to pay on deposits.
Borrowers gain access to finance for their business, farm or personal needs.
And the economy as a whole benefits from the prosperity made possible through the financing of a higher level of economic activity. There are, of course, limits to the ability of banks to create money in this way. In the first place, the system depends on banks having a sufficient deposit base to fund their lending operations. The ratio also determines the lending capacity of banks. In the Australian system, banks have undertaken to maintain a minimum capital requirement as a measure of protection of the interests of depositors.