So, the money exchange has been made and Ten Billion Dollars now sits in a bank account.
Here’s where it gets very interesting.
For as based on the fractional reserve practice, that Ten Billion Dollar deposit instantly becomes part of the bank’s reserves, just as all deposits do.
And regarding reserve requirements, as stated in “Modern Money Mechanics”, “A bank must maintain legally required reserves equal to a prescribed percentage of its deposits.”
It then quantifies this by stating, “Under current regulations, the reserve requirement against most transaction accounts is 10%.”
This means, with a Ten Billion Dollar deposit, 10% or $1,000,000,000 (One Billion) is held as the required reserve. The other Nine Billion is considered an excessive reserve and can be used as the basis for new loans.
It is logical to assume this $9,000,000,000.00 (Billion) is literally coming out of the existing $10,000,000,000.00 deposit.
However, this IS NOT the case.
As A Next Step, what really happens is the $9,000,000,000.00 is simply created out of thin air ON TOP OF the existing $10,000,000,000.00 this is how the money supply is expanded.
$9,000,000,000.00 plus $10,000,000,000.00 equals $19.000,000,000.00 ($19 Billion).
As stated in Modern Money Mechanics, (printed by the Fed) “Of course, they (the banks) do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is accept promissory notes (contracts) in exchange for credits (money) to the borrowers’ transaction accounts.”
In other words, the $9,000,000,000.00 can be created out of nothing simply because there is a demand for such a loan and that there is a $1,000,000,000.00 deposit to satisfy the reserve requirements.
This does not help us in America!
LOAN DEMAND = RESERVE = NEW MONEY CREATED
Let’s assume somebody walks into the bank that got this deposit, and borrows the newly available $9,000,000,000.00. They will then most likely take that money and deposit it into their own bank account.
The process then repeats.
That deposit becomes part of the bank’s reserves. Ten percent is isolated, then the 90% or $8,100,000,000.00 is now available as newly created money for more loans. And, of course, that $8,100,000,000.00 can be loaned out and re-deposited creating an additional $7,200,000,000.o0 to $6.500,000,000.00 to $5,900,000,000.00, etc.
This DEPOSIT, MONEY CREATION, LOAN CYCLE can technically go on to infinity. The average mathematically result is that about $90 Billion Dollars could be created on top of the original $10 Billion Dollars.
DEPOSIT MONEY CREATION / LOAN CYCLE
RESERVE EXPANSION OF
BASED LOANS THE MONEY SUPPLY
$10,000,000,000 $10,000,000,000
9,000,000,000 19,000,000,000
8,100,000,000 27,000,000,000
7,290,000,000 34,390,000,000
6,561,000,000 40,951,000,000
5,904,900,000 46,856,000,000
5,314,410,000 52,170,000,000
4,782,969,000 56,952,000,000
3,874,204,890 65,132,000,000
In other words, for every deposit that ever occurred in the banking system, about nine times that amount can be created out of thin air.
This I remember: when I first learned this I was sick to my stomach. I think you’re probably sick right about now, too.
Related Articles ~
Get Ready for Inflation and Higher Interest Rates
Battle Between Inflation and Deflation Must Be Monitored
Is the money supply contracting, or expanding?
Expansion of the Money Supply with a Fixed Exchange Rate
The Process of Money Creation and Credit Expansion
The Fed and the Creation and Control of Money
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