The story of checks Its all about excess reserves.
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Transcript of The story of checks Its all about excess reserves.
![Page 1: The story of checks Its all about excess reserves.](https://reader036.fdocuments.in/reader036/viewer/2022062517/56649f215503460f94c39e54/html5/thumbnails/1.jpg)
The story of checks
Its all about excess reserves
![Page 2: The story of checks Its all about excess reserves.](https://reader036.fdocuments.in/reader036/viewer/2022062517/56649f215503460f94c39e54/html5/thumbnails/2.jpg)
When you deposit currency in a bank checking account
• It is an on demand deposit
• The bank owes you the money– It is a liability to the bank– It is in debt to you for this amount
• The bank provides you with “letters of credit” or checks– Checks are a medium of exchange– The bank is circulating its debt
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Reserves
• Your bank can hold the currency in its vault– It is an asset– It means the bank can pay the debt
• Your bank can deposit your deposit in its account at the Federal Reserve Bank– It can let the FED worry about security
• When your check is deposited in the bearer’s bank, that bank trusts your bank that the letter of credit is worth what it says
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Unless you demand the currency
• The currency deposited never has to move
• One bank will accept another banks letter of credit as a deposit (liability) and reserve (asset) of its own– Its just a matter of bookkeeping
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Lindsay Lohan has checked into rehab, said the 20-year-old actress in a statement.Photo: AP
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Checks can more efficient than currency
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So far the bank has only replaced
money with money(currency with checks)
It hasn’t yet created additional
money (expanded the money supply)
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Money creation
And
Fractional
Reserves
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Britney Spears has apparently checked herself out of a rehab facility just 24 hours after entering.
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Reserve requirement
• In our example reserves (assets) equal checkable deposits (liabilities)– The ratio has been 1 to 1
• But our banking system allows a fractional reserve requirement
• Banks are required by law to maintain only a percent of the checkable deposits as reserves– Required reserves (currently 10%)
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Fractional required reserves
create excess reserves
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Money creation• Fractional reserves
– For every $100 deposited– The bank is only required to maintain $10– The bank can loan out the $90 of excess reserves
• Loans are assets for the bank• Every check you write, every debit card
transaction you make is only backed by 10% of your original currency deposit.– 90% of bank debt, circulating as checks, is
money created
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Money expansion – $100 becomes $1,000
• The $90 loan is deposited in another bankThat bank must maintain $9 on reserve
and has $81 in excess reserves, which it can loan
• The reciprocal of the reserve requirement is the money multiplier– Assuming 10% (1/10) reserve requirement
• Customers want to borrow all loans available• All loans are fully re-deposited in banks• Banks loan all excess reserves
A $100 checkable deposit will expand the money supply to a total of $1,000
$100 + $900 all other banks = $1,000 ($100 * 10)