Thursday 910

 

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 13 of 20
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Suppose First National Bank decides on a reserve ratio of 1/10, or 10%.
It keeps 10% of its deposits in reserve.
It loans out the 90% rest, to one Borrower A.
First National Bank’s new T-account is shown in Figure T2.
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First National Bank still has $100 in liabilities because making the loan
did not alter the bank's obligation to its depositors.
Now the bank has two kinds of assets
· $10 of reserves in its vault
· $90 of loans outstanding
The $90 loan is
· a liability of the Borrower A who took out the loan
· assets of the bank, because Borrower A will later repay the bank
First National's assets still equal its liabilities at $100.
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Before First National makes any loans, the money supply is the $100 of deposits in the bank.
When First National makes the $90 loan this is a money creation of $90 and the money supply increases.
The bank’s depositors still have demand deposits totaling $100.
But now Borrower A holds $90 more money.
The new money supply = loans + deposits = $190.
Thus, banks create money when they
· hold only a fraction of deposits in reserve, here $10
· loan out the rest, here $90
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First National Bank has created money out of thin air.
When a bank loans out some of its reserves it creates money.
However, the bank does not create any new wealth by making the loan.
Loans from First National give the borrowers money and the ability to make and buy goods and services.
But borrowers are also taking on debts, they must repay their loans.
After the loan Borrower A’s own T-account would show
· $90 on the left asset side
· $90 on the right liabilities side
The loan itself do not make Borrower A nor the economy richer.
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The initial result of this instance of First National Bank’s money creation through loan-making:
· Borrower A is able to buy and invest more, because there it has more money
· the economy is no wealthier than before
Economic wealth is created when individuals and companies make profits, profits are what create wealth.
If Borrower A pays 5% interest on the loan (the fee paid to the bank for the loan) but makes 10% gross profit from the assets bought with the loan, the 5% difference is net profit for Borrower A and new wealth for the economy.
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obligation of bank
ginkō no gimu
銀行の義務
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How does a bank decide whether or not to make a loan to a small business? CGPT:
A bank usually decides by determining whether the business is likely to repay the loan from normal cash flow.
It examines the owner’s and company’s credit history, income and expenses, existing debts, financial statements and tax returns, the amount and purpose of the loan, how much of the owner’s own money is invested, available collateral, and the condition of the business and industry.
The bank may also require collateral —such as real estate, equipment, inventory, or other assets— that it could claim and sell if the borrower fails to repay the loan.
Lenders often summarize this as the “5 Cs of credit” — character, capacity, capital, collateral, and conditions.
If the expected cash flow is strong enough to cover the loan payments with a reasonable safety margin, the bank is much more likely to approve it.
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Does a bank adjust the interest rate charged on a loan depending on the perceived risk of making the loan? CGPT:
Yes. Banks generally charge higher interest rates on loans they judge to be riskier and lower rates on safer loans.
The rate reflects factors such as the borrower’s credit history, cash flow, debt level, collateral, loan term, and the riskiness of the business or industry, along with prevailing market interest rates and the bank’s own funding costs.
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What is the current interest rate range, depending on perceived risk, do U.S. banks charge for small business loans? CGPT:
As of September 2026, conventional U.S. bank small-business loans are typically around 6% to 11%, depending on the borrower and loan.
Recent Federal Reserve Bank of Kansas City data show median new small-business loan rates around 6.7% to 7.1% at surveyed banks, while broader bank-loan estimates run about 6.37% to 10.98%.
A very strong borrower with good cash flow, collateral, and credit may get a rate near the lower end.
A riskier borrower may be charged toward the upper end — or simply be denied rather than offered an extremely high bank rate.
Online and nonbank lenders can charge much more.
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What did communist Vladimir Lenin think of the banking system of his time? CGPT:
Lenin viewed the banking system of his time as a central instrument of capitalism, concentrating savings and credit in the hands of large financial interests and helping powerful banks and industrial firms dominate the economy.
In Imperialism, the Highest Stage of Capitalism (1916), he argued large banks had evolved from simple intermediaries into powerful monopolistic institutions closely tied to major corporations.
At the same time, Lenin believed this highly organized banking network could be taken over by the state and used for socialism: instead of abolishing banking, he wanted the major banks nationalized and combined into a centralized public system that could keep accounts, distribute credit, and help administer the economy according to government needs and plans.