Because fractional reserve banking [doesn’t cause inflation](https://whatismoney.info/fractional-reserve-banking-inflation/) – at least not in the long term.
The type of inflation you are thinking about is demand-pull inflation – where inflation happens because there is more demand for goods than can be supplied, causing prices to increase. When brand-new money is introduced into an economy, the net increase in the amount of currency causes a spike in demand (I have extra money, so I want to spend it on extra things) which can cause demand-pull inflation. This would lead one to believe that fractional reserve banking would cause inflation, as FRB does “create” new money out of thin air.
_However_, every dollar that is created by FRB is a dollar that has to be _repaid to the bank_ at some point in the future. The spike in demand today will be met with a _reduction_ in demand every day afterward as I forego spending to repay my loan. With every repayment, the money that the bank “created” with FRB is “destroyed.”
So the inflation that may happen immediately due to demand-pull is offset by the reduction in demand going forward. At a macro-level, this all balances out as millions of loans are taken out and repaid every day – for every spike in a new loan, there are drops due to loan repayments.
Latest Answers