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    This document discusses how commercial banks create money through expanding deposits and bank credit. It explains that individual banks cannot expand credit and create deposits without limit, as most new deposits are soon transferred to other banks. However, as a whole the banking system can increase deposit money to the extent that banks maintain required reserves set by the Federal Reserve System. The document also notes a close relationship between long-term trends in total debt and gross national product, indicating that higher debt levels have stimulated economic growth.

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    Page 25

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    ncwazzy
    154 views1 page
    This document discusses how commercial banks create money through expanding deposits and bank credit. It explains that individual banks cannot expand credit and create deposits without limit, as most new deposits are soon transferred to other banks. However, as a whole the banking system can increase deposit money to the extent that banks maintain required reserves set by the Federal Reserve System. The document also notes a close relationship between long-term trends in total debt and gross national product, indicating that higher debt levels have stimulated economic growth.

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    This document discusses how commercial banks create money through expanding deposits and bank credit. It explains that individual banks cannot expand credit and create deposits without limit, as most new deposits are soon transferred to other banks. However, as a whole the banking system can increase deposit money to the extent that banks maintain required reserves set by the Federal Reserve System. The document also notes a close relationship between long-term trends in total debt and gross national product, indicating that higher debt levels have stimulated economic growth.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    154 views1 page

    Page 25

    Uploaded by

    ncwazzy
    This document discusses how commercial banks create money through expanding deposits and bank credit. It explains that individual banks cannot expand credit and create deposits without limit, as most new deposits are soon transferred to other banks. However, as a whole the banking system can increase deposit money to the extent that banks maintain required reserves set by the Federal Reserve System. The document also notes a close relationship between long-term trends in total debt and gross national product, indicating that higher debt levels have stimulated economic growth.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 1

    and other financial institutions provide in their operations

    as intermediaries between savers and users of savings.

    But individual banks cannot expand credit and create


    deposits without limit. Furthermore, most of the deposits
    spe-: -- they create are soon transferred to other banks. A deposit
    created through lending is a debt that has to be paid on
    demand of the depositor, just the same as the debt arising
    from a customer's deposit of checks or currency in the bank.
    By writing checks, the borrower can spend the deposit he
    acquired by borrowing. The recipients of his checks·deposit
    them in their banks. They, in turn, are presented for payment
    to the bank on which they are drawn. As a result, the newly
    created deposit can be shifted out of the originating bank, but
    it remains part of the money supply until the debt is repaid.

    No effort is made here to give a detailed explanation of


    the creation of money through the expansion of deposits and
    bank credit. 3 For present purposes, it is enough to point
    out that commercial banks as a whole can make additional
    loans and investments, and thereby increase deposit money,
    to the extent that they have the required amount of reserves
    against the increased deposits. The amount of reserves, in
    turn, is controlled by the Federal Reserve System-the cen-
    tral bank of the United States.

    . a stimulus to growth

    The chart on page 26 shows the close relationship be-


    tween long-term trends in total debt and the value of the
    nation's production of goods and services, as measured by
    gross national product. 4 Although these aggregates have

    'For a description of this process, see Modern Money Mechanics: A


    Workbook on Deposits, Currency and Bank Reserves, available on
    request from the Federal Reserve Bank of Chicago.
    'It can be argued that the inclusion of money-type debt is not
    appropriate in the comparison of debt with economic activity since
    it involves double counting of the credits that flow through financial
    institutions from savers to users. Although the inclusion of these
    liabilities raises the level of debt relative to income, it has little effect
    on the changes in that ratio over time.

    25

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