Tuesday 908

 

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 11 of 22
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Banks play a central role in the monetary system.
The amount of money you hold includes both
· currency, the paper and coin money you have in your wallet
· demand deposits, the balance in your checking account
Because of the demand deposits held in banks the behavior of banks can influence the quantity of demand deposits in the economy and therefore influence the money supply.
Here we will look at how banks affect the money supply and how they complicate the Fed's job of controlling the money supply.
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Imagine an economy where there are no banks and currency is the only form of money.
Suppose the total economy currency quantity is $100, therefore the money supply is $100.
Then, someone opens a bank, “First National Bank.”
First National Bank is only a depository institution.
It accepts deposits and checking accounts but does not make loans.
The bank’s purpose is to give depositors a safe place to keep their money.
Whenever a person deposits money the bank keeps it in its vault until the depositor comes to withdraw it or writes a check taking money out of their balance.
The money banks have received and remain as deposits are called reserves.
In our imaginary economy all deposits are held as reserves, none are loaned out.
This system is called 100-percent reserve banking.
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Per Figure T1 we can express the financial position of First National Bank with a T-account.
This is a simplified accounting statement that shows changes in a bank's assets and liabilities.
On the left side of the T-account are the bank's assets of $100, these are the reserves it holds in its vaults.
On the right side of the T-account are the bank's liabilities of $100, this is the amount it owes to its depositors.
The assets and liabilities of First National Bank exactly balance, here at $100.
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Now consider the money supply in this imaginary economy.
Before First National Bank opened the money supply was $100, the amount of currency people held in their homes.
After First National Bank opens people deposit all their currency in the bank which puts it in its vault.
The money supply becomes the $100 of demand deposits in the bank.
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Each deposit in the bank reduces currency and raises demand deposits by the same amount.
The money supply is unchanged.
Bank depositors write checks simply to move cash out of the bank to pay expenses.
So, if First National Bank holds all deposits in reserve it does not make any loans and it does not influence the money supply.
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assets and liabilities
shisan oyobi fusai
資産及び負債
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To avoid risk of bank failure and depositors losing their money why shouldn’t banks practice 100-percent reserve banking, with a small service charge paid to banks by depositors?
ChatGPT:
Banks could use 100-percent reserve banking, and economists have periodically proposed versions of it, but it would fundamentally change what banks do.
If every checking-account dollar had to remain in reserve, banks could not use those deposits to make loans, so mortgages, business loans, and other credit would have to be funded from time deposits, bonds, shareholders’ capital, or other investment funds instead.
Depositors would have to pay service charges because checking accounts would no longer generate lending income for banks.
The advantage would be ordinary transaction deposits would be extremely safe and bank runs (people rushing to banks to take out deposited money) would be far less likely.
The disadvantage would be banks could not lend, so loans would have to be funded from other sources and would become scarcer and more expensive (higher interest rates), while some lending might shift to less-regulated financial institutions including black markets.
The modern banking system instead allows fractional-reserve (less than 100% reserve requirement) banking while trying to control bank failure risk through FDIC deposit insurance and Federal Reserve Bank oversight and emergency lending.