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:
“This spending of the best part of one’s life earning money in order to enjoy a questionable liberty during the least valuable part of it reminds me of the Englishman who went to India to make a fortune first, in order that he might return to England and live the life of a poet. He should have gone up garret at once.”
—Henry David Thoreau (1817–1862)
“Poetry, at all times, exercises two distinct functions: it may reveal, it may unveil to every eye, the ideal aspects of common things ... or it may actually add to the number of motives poetic and uncommon in themselves, by the imaginative creation of things that are ideal from their very birth.”
—Walter Pater (1839–1894)
“Hummingbird
stay for a fractional sharp
sweetness, and’s gone, can’t take
more than that.”
—Denise Levertov (b. 1923)
“If a walker is indeed an individualist there is nowhere he can’t go at dawn and not many places he can’t go at noon. But just as it demeans life to live alongside a great river you can no longer swim in or drink from, to be crowded into safer areas and hours takes much of the gloss off walking—one sport you shouldn’t have to reserve a time and a court for.”
—Edward Hoagland (b. 1932)
“Authority is the spiritual dimension of power because it depends upon faith in a system of meaning that decrees the necessity of the hierarchical order and so provides for the unity of imperative control.”
—Shoshana Zuboff (b. 1951)