The laws allow banks to issue loans up to a certain multiple over their reserves even if they don't have the money at hand. Banks make money from loans and the interest on that is the profit. A bank has to have a reserve in case anything goes wrong but the law allows them to loan more than they actually have. If everything came crashing down there would be problems.
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Ok, so you told me what I already know, which is what is fractional-reserve banking but, the real question remains unanswered.
Why is it not illegal?