In regards to my comment earlier about who creates money. No I am not talking about central banks printing money as 90% of the worlds money does not exist in physical form. I am talking about money creating transactions of banks. I will try and explain it for you
1. Single Newly Established Bank Assets: Cash $250000
Liabilities & Networth: Capital Stock $250000
2. Bank needs building Assets: Cash $10000 Property $240000
Liabilities & Networth: Capital Stock $250000
3. Bank now accepts deposits Assets: Cash $110000 Propert $240000
Liabilities & Networth: Deposits $100000 Capital Stock $250000
Liabilities & Networth: Deposits $100000 Capital Stock $250000
So for the example the bank is required to maintain 20%. Deposit liabilities $100000 x 20% = $20000. actual reserves $110000 - required reserves $20000 = $90000
5. When a cheque is drawn against the bank Assets: Reserves $60000 Property $240000
Liabilities & Networth: Deposits $50000 Capital Stock $250000
Still using the 20% reserve it will work like this
Bank : Reserves : Required Res : Excess Res$Avail to lend A $100 $20 $80 B $80 $16 $64 C $64 $12.80 $51.20 D $51.20 $10.24 $40.96 E $40.96 $8.19 $32.77 F $32.77 $6.55 $26.22 G $26.22 $5.24 $20.98 H I J K L M N Other
Stuff it to many number anyway if I could be bothered to finish that table it would show that for each $100 deposited into Bank A effectively $400 is created. But hold on PennyO that cant be right only central banks create money I think there was something in your post regarding some African countries problems.
The banking system as a whole can lend by a multiple of its excess reserves because it cannot lose reserves, even though individual banks can lose reserves to other banks in the system.
It is the retention of excess reserves within the banking system that forms the basis for the ability of the banking system to create deposit money.
This process can be reversed though and leads to a multiple reduction in the level of deposits and the supply of money if reserves are withdrawn. This is why KRudd guaranteed all banks deposits. Also savings rates have been greatly increased at the moment as reported in main stream media. This is causing banks to be building massive reserves for when market sentiment returns.
