Zeitgeist: Addendum Page #2
- NOT RATED
- Year:
- 2008
- 123 min
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or a liability, will become more clear
as we further this exercise.
So, the exchange has been made.
And now, ten billion dollars sits
in a commercial bank account.
Here is where it gets really interesting.
For, as based on the fractional reserve practice,
that ten billion dollar deposit
instantly becomes part of the banks 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 ten percent.
This means that with a ten billion dollar deposit,
ten percent, or one billion,
is held as the required reserve.
While the other nine billion is
considered an excessive reserve,
and can be used as the basis
for new loans.
Now, it is logical to assume, that this nine billion
is literally coming out of the
existing ten billion dollar deposit.
However, this is actually not the case.
What really happens, is that the nine billion
is simply created out of thin air
on top of the existing 10 billion dollar deposit.
This is how the money supply is expanded.
As stated in "Modern Money Mechanics":
"Of course they" the banks,
"do not really pay out loans for the money, they receive as deposits.
If they did this, no additional money would be created.
What they do when they make loans
is to accept promissory notes
- loan contracts
in exchange for credits - money
to the borrowers transaction accounts.
In other words, the nine billion
can be created out of nothing.
Simply because there is a demand for such a loan,
and that there is a 10 billion dollar
deposit to satisfy the reserve requirements.
Now let's assume that somebody
walks into this bank and
borrows the newly available nine billion dollars.
They will then most likely
take that money and deposit it
into their own bank account.
The process then repeats.
For that deposit becomes part of the banks reserves.
Ten percent is isolated and in
turn 90 percent of the nine billion,
or 8.1 billion is now availlable as
newly created money for more loans.
And, of course, that 8.1 can be loaned out
and redeposited creating an additional 7.2 billion
to 6.5 billion... to 5.9 billion... etc...
This deposit money creation loan
cycle can technically go on to infinity.
The average mathematical result is that about 90 billion
dollars can be created on top of the original 10 billion.
In other words:
For every deposit that ever occurs in the banking system,
about nine times that amount can be created out of thin air.
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"Zeitgeist: Addendum" Scripts.com. STANDS4 LLC, 2024. Web. 20 Apr. 2024. <https://www.scripts.com/script/zeitgeist:_addendum_23962>.
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