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There's a huge difference between 10% and 0%. A 10% reserve requirement means the credit supply can expand to 10x the amount of the original deposits (100% + 9
by dfranke 17y ago
There's a huge difference between 10% and 0%. A 10% reserve requirement means the credit supply can expand to 10x the amount of the original deposits (100% + 90% + 81% + 72.9% + 65.61% + ... = 10). A 0% reserve requirement means it can expand infinitely (100% + 100% + 100% + 100% + ...).
Edit: here are the current minimums: http://www.federalreserve.gov/monetarypolicy/reservereq.htm http://www.federalreserve.gov/monetarypolicy/reservereq.htm
They're indeed 10% for all but the tiniest banks.
- teilo 17y agoIn practical terms, a 10% reserve really equates to more like an 8-fold increase. To say that a 0% reserve means that the reserve could expand infinitely is a bit overstating the matter. There are practical limits purely based upon how many times a given loaned dollar can be deposited and re-loaned by a series of banks. Furthermore, the loans are not made at zero interest. The interest charged in the loan also serves as a break for monetary expansion. Of course, the issue here with a fractional reserve system of ANY kind is that it's impossible for the country to get out of debt without erasing the money supply. Without debt, there is no money. But the point I am making is that the Fed has had this power since the end of the Bush administration. Bernanke does not need to ask permission. The directors can lower the reserve requirement whenever they wish.