Zeitgeist: Addendum Page #2

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.

Rate this script:0.0 / 0 votes