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 actual reserves of a commercial bank equal excess reserves plus required reserves.

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

A check for $1000 drawn on Bank X by a depositor and deposited in Bank Y will increase the excess reserves in Bank Y by $1000.

A single commercial bank can safely lend an amount equal to its excess reserves multiplied by the monetary multiplier ration.

When a borrower repays a loan of $500, either in cash or by check, the supply of money is reduced by $500.

The granting of a $5000 loan and the purchase of a $5000 government bond from a securities dealer by a commercial bank have the same effect on the money supply.

The selling of a government bond by a commercial bank will increase the money supply.

A commercial bank seeks both profits and liquidity, but these are conflicting goals.

The Federal funds rate is the interest rate at which the Federal government lends funds to commercial banks.

The reason that the banking system can lend by a multiple of its excess reserves, but each individual bank can only lend "dollar for dollar" with its excess reserves, is that reserves lost by a single bank are not lost to the banking system as a whole.

The monetary multiplier is excess reserves divided by required reserves.

The maximum checkable deposit expansion is equal to excess reserves divided by the monetary multiplier.

When borrowers from a commercial bank wish to have cash rather than checkable deposits, the money creating potential of the banking system is increased.

A desire by banks to hold excess reserves may reduce the size of the monetary multiplier.

There is a need for the Federal Reserve System to control the money supply because profit-seeking banks tend to make changes in the money supply that are pro-cyclical.