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"A bank" is not the same as "the bank". In your example, the money borrowed by Charlie from B does later go back to bank B. But if you remove the last transac
by kgwgk 5y ago
"A bank" is not the same as "the bank".
In your example, the money borrowed by Charlie from B does later go back to bank B.
But if you remove the last transaction it doesn't.
Hence, it doesn't necessarily happen.
- iso1210 5y agoBank A $0 deposit Bank B $1m deposit Total deposits: $1m Fred borrows $900k from Bank B and gives to Geraldine who puts it in Bank A Bank A $900k deposit with no loan Bank B $1m deposit with 900k loan (90%) Total deposits $1.9m (90% above initial deposits) Henry borrows 800k from Bank A and gives to Iris who puts it into Bank A Bank A $1.7m with 800k loans (loans at 60%) Bank B $1m deposit (loans at 90%) Total deposits $2.7m (170% above initial deposits) And the cycle continues, doesn't matter how many banks.
- deleted 5y ago[deleted]
- kgwgk 5y agoThere is no cycle for bank B there. It went from Bank B $1m deposit [$100k required reserves + $900k excess reserves] to Bank B $1m deposit with 900k loan (90%) [$100k required reserves + zero excess reserves] and it's still there at the end. It doesn't have excess reserves, it cannot make new loans if it cannot get more money. To be clear, my original comment was: "The money created doesn’t necessarily go back to the bank. When you take a loan you use the money for something, not to keep it in an account at that bank. It will typically end in another bank." The bank =/= A bank One bank =/= The banking system [Of course when another bank gets more reserves it increases their capacity to extend new loans. The question was whether a bank with $1m in deposits can lend $9m, not whether the whole banking system could.]