Ch. 14 How Banks And Thrifts Create Money

The balance sheet of a commercial bank shows the transactions in which the bank has engaged during a given period of time.

Goldsmiths increased the money supply when they accepted deposits of gold and issued paper receipts to the depositors.

Modern banking systems use hold as the basis for the fractional reserve system.

Cash held by a bank is sometimes called vault cash.

Mary Lynn, a music star, deposits a $30,000 check in a commercial bank and receives a checkable deposit in return; one hour later the Manford Iron and Coal Company borrows $30,000 from the same bank.  The money supply has increased by $30,000 as a result of the two transactions.

A commercial bank may maintain its legal reserve either as a deposit in its Federal Reserve Bank or as government bonds in its own vault.

The legal reserve that a commercial bank maintains must equal its own deposit liabilities multiplied by the required reserve ration.

Legal reserves permit the Board of Governors of the Federal Reserve System to influence the lending ability of commercial banks.

The reserve of a commercial bank in the Federal Reserve Bank is an asset of the Federal Reserve Bank.