Monday 914

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 10 Money and Prices in the Long Run
Chapter 29 of 36 The Monetary System
Section 14 of 20
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The creation of money continues after First National Bank has made the first loan.
Per Figure T2
· initial deposit of $100 has been made at First National Bank
· First National keeps $10 as reserves in its vault
· then it loans out $90
Suppose borrower A who got the $90 loan from First National
· uses the $90 to purchase something from someone
· who in turn deposits the currency in a different Second National Bank
Per Figure T3
· Second National also has a reserve ratio of 10%
· it keeps currency assets of $9 in reserve
· and makes a $81 loan to a borrower B
Second National Bank thereby has created an additional $81 of money.
Per Figure T4
· this $81 is next deposited by borrower B in Third National Bank
· which also has a reserve ratio of 10%
· this bank keeps $8.10 currency in reserve in its vault
· and makes $72.90 in loans
Per Figure A, money supply finally becomes $343.90.
…
Each time money is deposited and a bank loan is made more money is created, which is the amount of each loan.
We find the end total money supply by adding
· the original money supply = the original $100 deposit in First National Bank
· and all the subsequent loans
In this example:
A Original money supply = original deposit = $100.00
B First National loan = $ 90.00
C Second National loan = $ 81.00
D Third National loan = $ 72.90
A + B + C + D = $343.90 ending money supply
Although this example has three different banks all the re-deposits could be at First National Bank with same ending money supply increase.
…
Through three rounds of loans the money supply has become $343.90.
This could continue until, per a formula discussed in the next section:
Newly created money becomes $900.00
Total money supply becomes $1,000.00
… …
this example has three different banks
kono rei de mittsu no kotonaru ginkō
この例で三つの異なる銀行
… …
What is the current money supply in the U.S. and what would the money supply be if banks had to adhere to 100% reserve banking and could not make loans? ChatGPT:
The current U.S. broad money supply, measured by M2 [see Figure 1], is about $23.2 trillion.
The U.S. monetary base —physical currency plus bank reserves held at the Federal Reserve— is about $5.5 trillion.
In a strict 100% reserve banking system, where banks could not create new deposit money by making loans, the money supply would theoretically be closer to that $5.5 trillion monetary base if the Federal Reserve did not create additional money.
That would represent a reduction of roughly 76% from today's M2 money supply.
…
However, adopting 100% reserve banking would not necessarily mean the money supply had to fall that much.
The Federal Reserve could create additional base money to replace the bank-created deposit money being eliminated.
It could theoretically increase the monetary base from about $5.5 trillion to roughly $23 trillion, allowing the overall money supply to remain near its present size.
The major difference would be that nearly all money would ultimately be created by the Federal Reserve or government rather than being created by commercial banks when they make loans.