Money Creation Through The Fractional Reserve System
Through fractional-reserve banking, the modern banking system expands the money supply of a country beyond the amount initially created by the central bank. There are two types of money in a fractional-reserve banking system, currency originally issued by the central bank, and bank deposits at commercial banks:
- central bank money (all money created by the central bank regardless of its form, e.g. banknotes, coins, electronic money)
- commercial bank money (money created in the banking system through borrowing and lending) - sometimes referred to as checkbook money
When a commercial bank loan is extended, new commercial bank money is created. As a loan is paid back, more commercial bank money disappears from existence. Since loans are continually being issued in a normally functioning economy, the amount of broad money in the economy remains relatively stable. Because of this money creation process by the commercial banks, the money supply of a country is usually a multiple larger than the money issued by the central bank; that multiple is determined by the reserve ratio or other financial ratios (primarily the capital adequacy ratio that limits the overall credit creation of a bank) set by the relevant banking regulators in the jurisdiction.
Read more about this topic: Money Creation
Famous quotes containing the words money, creation, fractional, reserve and/or system:
“What is important for kids to learn is that no matter how much money they have, earn, win, or inherit, they need to know how to spend it, how to save it, and how to give it to others in need. This is what handling money is about, and this is why we give kids an allowance.”
—Barbara Coloroso (20th century)
“The creation of a thousand forests is in one acorn, and Egypt, Greece, Rome, Gaul, Britain, America, lie folded in the first man.”
—Ralph Waldo Emerson (1803–1882)
“Hummingbird
stay for a fractional sharp
sweetness, and’s gone, can’t take
more than that.”
—Denise Levertov (b. 1923)
“Her face had the seamed reserve of the old in this country [Japan]. It was a neighborhood poignantly rich in old ladies.”
—Angela Carter (1940–1992)
“In the course of the actual attainment of selfish ends—an attainment conditioned in this way by universality—there is formed a system of complete interdependence, wherein the livelihood, happiness, and legal status of one man is interwoven with the livelihood, happiness, and rights of all. On this system, individual happiness, etc. depend, and only in this connected system are they actualized and secured.”
—Georg Wilhelm Friedrich Hegel (1770–1831)