5 ms·

A 10% reserve requirement would mean that if you deposit $100, then your bank can then lend out $90 of it, not $1000. The money supply has expanded because the

by jonas21 11y ago

A 10% reserve requirement would mean that if you deposit $100, then your bank can then lend out $90 of it, not $1000. The money supply has expanded because there is now $190 of things that work like cash out there -- the $100 on my bank account balance plus the $90 that was lent to someone else -- but this is very different from saying the bank can turn around and lend out a multiple of what I have deposited.

pdonis 11y ago
> A 10% reserve requirement would mean that if you deposit $100, then your bank can then lend out $90 of it, not $1000. I misstated it somewhat, yes. The $90 gets lent out--and where does it end up? In someone else's bank deposit. Then $81 of that gets lent out, and ends up--in yet another bank deposit. And so on... At the end of this process, your original deposit has been multiplied by the reciprocal of whatever the reserve requirement is. So a 10% reserve means a multiplier of 1/.01 = 10. So your original deposit of $100 turns into a total of $1000. (So I shouldn't have said that your $100 turns into an additional $1000 lent out--I should have said the total money supply is $1000.) Remember also that, even though $90 of your $100 was lent out, you can still walk into the bank and withdraw the $100 any time; you don't have to wait until whoever borrowed the $90 pays it back. The same is true of all the other deposits spawned by the $90 that is borrowed, and the $81 borrowed against that, and so on... So, again, the final effect of your depositing $100 is that the total money supply is $1000.
- riphay 11y ago
  > you can still walk into the bank and withdraw the $100 any time This is true, but if everyone did this at once it would constitute a run on the bank and it would fall under its reserve ratio. Not to mention the amount of money in the banking system is far far more than physical currency in print. This is part of why some types of accounts (trading accounts etc.) require a few days to clear transactions. The expansion of the money supply is throughout the banking system and not just cash and deposits.
  - pdonis 11y ago
    > This is true, but if everyone did this at once it would constitute a run on the bank and it would fall under its reserve ratio. Yes, it would. So what? That isn't what stops bank runs from happening. What stops them from happening (now) is that people believe that their deposits are "guaranteed" by the government, so there's no need to go rushing to the bank and withdraw notes every time the economy takes a downturn. Before that guarantee was in place, there were indeed bank runs, and for the very reason I gave. > the amount of money in the banking system is far far more than physical currency in print. Yes, that's definitely true. And it's also true that most transactions, even for individuals, are not done in physical notes any more; they're done electronically (with debit cards or credit cards or wire transfers or whatever). So someone doesn't have to walk into the bank and withdraw their $100 in physical notes; they can do it any place, any time.
    - thaumasiotes 11y ago
      > And it's also true that most transactions, even for individuals, are not done in physical notes any more; they're done electronically (with debit cards or credit cards or wire transfers or whatever). So someone doesn't have to walk into the bank and withdraw their $100 in physical notes; they can do it any place, any time. The difference between a credit card and a debit card is extremely relevant here. You can't run a bank with a credit card.
      - pdonis 11y ago
        > You can't run a bank with a credit card. Not when you make a credit card purchase, no. But you can when you electronically transfer funds from your bank account to pay the credit card bill.
cloverich 11y ago
I've heard this many times but never understood it. How is there $190 of things that work like money? It seems like $10 of the original $100 is locked up, and only $90 is available in for purchasing goods; the owner cant use his money like money (only the assurance of "having" it, not the property of buying anything with it) -- only the person who ultimately gets lended that money can.
- kbenson 11y ago
  Because we aren't trading actual goods, but notes that are "guaranteed" to be worth something. That's fiat money. You aren't trading actual gold coins, or even coins or notes guaranteed to represent a specific amount of gold or silver, but notes guaranteed to worth something as long as well still believe in them. It's a system of trust, and if enough people distrusted that the notes were worth anything, it would collapse (as has happened in other countries in the past). So, even if an entity had $1 in reserve, but gave you notes representing $1,000,000, that money is valid as long as both the person you are trying to pay with it trusts that the issuing entity will honor the note, and it is worth the trade being offered (services, goods, etc). It might not be a good idea to trust that entity, but if the system persists long enough, and the entity makes enough money on fees and interest to actually cover the extravagant lending before people try to claim the notes, then in the end it was (or may be, depending on the parties involved) a net success. The issuing entity made money on the loan, the person taking out the loan was able to use it to provide needed liquidity (hopefully leveraged to make their situation better), and the person paid with the notes was able to redeem them at the issuing entity, or use them with other people successfully. What we have currently is that the government issues, but does not want to be responsible for vetting individual loans, so only loans to large entities that then re-lend (and these lenders may take deposits as a bank or have other sources of cash to lend out). They also require these lending entities keep a portion of the amount they lend in reserve (the $1 from above), but at a certain percentage rate such that they expect in most instances the re-lending institution can weather most cases of increased demand to make good on the money for their loans (otherwise a lender could over-leverage themselves with far too much lent to deal with even normal economic events).
- thaumasiotes 11y ago

by jonas21 11y ago

pdonis 11y ago

> A 10% reserve requirement would mean that if you deposit $100, then your bank can then lend out $90 of it, not $1000. I misstated it somewhat, yes. The $90 gets lent out--and where does it end up? In someone else's bank deposit. Then $81 of that gets lent out, and ends up--in yet another bank deposit. And so on... At the end of this process, your original deposit has been multiplied by the reciprocal of whatever the reserve requirement is. So a 10% reserve means a multiplier of 1/.01 = 10. So your original deposit of $100 turns into a total of $1000. (So I shouldn't have said that your $100 turns into an additional $1000 lent out--I should have said the total money supply is $1000.) Remember also that, even though $90 of your $100 was lent out, you can still walk into the bank and withdraw the $100 any time; you don't have to wait until whoever borrowed the $90 pays it back. The same is true of all the other deposits spawned by the $90 that is borrowed, and the $81 borrowed against that, and so on... So, again, the final effect of your depositing $100 is that the total money supply is $1000.

riphay 11y ago
> you can still walk into the bank and withdraw the $100 any time This is true, but if everyone did this at once it would constitute a run on the bank and it would fall under its reserve ratio. Not to mention the amount of money in the banking system is far far more than physical currency in print. This is part of why some types of accounts (trading accounts etc.) require a few days to clear transactions. The expansion of the money supply is throughout the banking system and not just cash and deposits.
- pdonis 11y ago
  > This is true, but if everyone did this at once it would constitute a run on the bank and it would fall under its reserve ratio. Yes, it would. So what? That isn't what stops bank runs from happening. What stops them from happening (now) is that people believe that their deposits are "guaranteed" by the government, so there's no need to go rushing to the bank and withdraw notes every time the economy takes a downturn. Before that guarantee was in place, there were indeed bank runs, and for the very reason I gave. > the amount of money in the banking system is far far more than physical currency in print. Yes, that's definitely true. And it's also true that most transactions, even for individuals, are not done in physical notes any more; they're done electronically (with debit cards or credit cards or wire transfers or whatever). So someone doesn't have to walk into the bank and withdraw their $100 in physical notes; they can do it any place, any time.
  - thaumasiotes 11y ago
    > And it's also true that most transactions, even for individuals, are not done in physical notes any more; they're done electronically (with debit cards or credit cards or wire transfers or whatever). So someone doesn't have to walk into the bank and withdraw their $100 in physical notes; they can do it any place, any time. The difference between a credit card and a debit card is extremely relevant here. You can't run a bank with a credit card.
    - pdonis 11y ago
      > You can't run a bank with a credit card. Not when you make a credit card purchase, no. But you can when you electronically transfer funds from your bank account to pay the credit card bill.

cloverich 11y ago

I've heard this many times but never understood it. How is there $190 of things that work like money? It seems like $10 of the original $100 is locked up, and only $90 is available in for purchasing goods; the owner cant use his money like money (only the assurance of "having" it, not the property of buying anything with it) -- only the person who ultimately gets lended that money can.

kbenson 11y ago
Because we aren't trading actual goods, but notes that are "guaranteed" to be worth something. That's fiat money. You aren't trading actual gold coins, or even coins or notes guaranteed to represent a specific amount of gold or silver, but notes guaranteed to worth something as long as well still believe in them. It's a system of trust, and if enough people distrusted that the notes were worth anything, it would collapse (as has happened in other countries in the past). So, even if an entity had $1 in reserve, but gave you notes representing $1,000,000, that money is valid as long as both the person you are trying to pay with it trusts that the issuing entity will honor the note, and it is worth the trade being offered (services, goods, etc). It might not be a good idea to trust that entity, but if the system persists long enough, and the entity makes enough money on fees and interest to actually cover the extravagant lending before people try to claim the notes, then in the end it was (or may be, depending on the parties involved) a net success. The issuing entity made money on the loan, the person taking out the loan was able to use it to provide needed liquidity (hopefully leveraged to make their situation better), and the person paid with the notes was able to redeem them at the issuing entity, or use them with other people successfully. What we have currently is that the government issues, but does not want to be responsible for vetting individual loans, so only loans to large entities that then re-lend (and these lenders may take deposits as a bank or have other sources of cash to lend out). They also require these lending entities keep a portion of the amount they lend in reserve (the $1 from above), but at a certain percentage rate such that they expect in most instances the re-lending institution can weather most cases of increased demand to make good on the money for their loans (otherwise a lender could over-leverage themselves with far too much lent to deal with even normal economic events).
thaumasiotes 11y ago