So, fractional reserve banking.

[georgiaboy]

I recently heard JEGriffin mention that fractional reserve banking works this way:

Assuming 10% reserves required by banks: I deposit $100, so the bank can now lend out up $900

I remember thinking myself that 10% reserves meant that if I deposited $100, the bank could loan up to $90 of that $100, leaving $10 reserves.

To me these are very different, the first example being inflationary, the second one not (I think).

Which one is correct? I figure JEG is correct, but just thought I'd ask.

[MoneyWhereMyMouthIs2]

I recently heard JEGriffin mention that fractional reserve banking works this way:

Assuming 10% reserves required by banks: I deposit $100, so the bank can now lend out up $900

Actually, you were correct later when you said that they can lend out $90. However, it is assumed whatever they lend becomes someone else's deposit. So, that $90 becomes a deposit at another bank. That bank can now lend out $81. That $81 is now deposited someplace, and 90% of that $81 becomes another corresponding deposit and loan. Rinse and repeat.

[wgadget]

Exponents come to mind.

Mind-blowing exponents.



The bummer is in the unwinding, I'm told.

[georgiaboy]

Actually, you were correct later when you said that they can lend out $90. However, it is assumed whatever they lend becomes someone else's deposit. So, that $90 becomes a deposit at another bank. That bank can now lend out $81. That $81 is now deposited someplace, and 90% of that $81 becomes another corresponding deposit and loan. Rinse and repeat.

Ah! Yep, and it eventually addes up to JEG's original statement. So the mechanism is as you and I stated, and the end result is JEG's.

Thx.

Now that I know, I wish I didn't know. :/

[Seraphim]

GOLD and SILVER.

I'm glad I know.

The coming GLOBAL sized bank run will not effect me nearly as much.

Ah! Yep, and it eventually addes up to JEG's original statement. So the mechanism is as you and I stated, and the end result is JEG's.

Thx.

Now that I know, I wish I didn't know. :/

[MoneyWhereMyMouthIs2]

Ah! Yep, and it eventually addes up to JEG's original statement. So the mechanism is as you and I stated, and the end result is JEG's.

Thx.

Now that I know, I wish I didn't know.

Yes... he might have said "banks can lend out..." Usually, when people are talking about this they just call it an expansion of the money supply.

This page has a description of the equation. Search the page for "money multiplier."

http://www.cliffsnotes.com/study_gui...leId-9747.html

money multiplier = 1 / reserve requirement.

[Tpoints]

Ah! Yep, and it eventually addes up to JEG's original statement. So the mechanism is as you and I stated, and the end result is JEG's.

Thx.

Now that I know, I wish I didn't know. :/

you wish you were ignorant?

[MoneyWhereMyMouthIs2]

you wish you were ignorant?

Ignorance is bliss. It's not an old saying for no reason.

[Bern]

Interestingly, there have been recent, high-profile calls for ending fractional reserve banking (from England).

[Zippyjuan]

Actually, you were correct later when you said that they can lend out $90. However, it is assumed whatever they lend becomes someone else's deposit. So, that $90 becomes a deposit at another bank. That bank can now lend out $81. That $81 is now deposited someplace, and 90% of that $81 becomes another corresponding deposit and loan. Rinse and repeat.

But if I take out my deposit, the bank has to try to recall the loan made based on my deposit or attract a new deposit.

Let's do a short run sample.

I have $100. I deposit it in a bank with a 10% reserve requirement. That means they can lent out $90. I have zero dollars, the bank has $10 and the customer has $90.

That person does not spend the money but deposits it back into the bank. The bank now has $100. From that second deposit, they can lend out $81. The bank now has $19 and I have zero, the first borrower has zero and the second borrower has $81.

He doesn't spend it and puts it back into the bank. An $81 deposit so they can loan out $72.90. The bank has $27.10 in cash I and the first borrower have zero. The total money is still $100. What is growing is the amount owed to people.

Let's make it personal. I have $20. Bill wants to borrow $20 so I give it to him. Now he owes me $20. Charles needs money and runs into Bill. Bill lends him $10. I have zero, Bill has $10 (but owes me $20) and Charles has $10 and owes Bill $10. How much money was actually created? Is there more than the $20 out there circulating? Is it $20 or is it $50?