New Money Creation

1
New Money Creation

• The following slide examines the creation of new
  money through the fractional reserve system
• Assume
• Initial excess reserves 100
• Reserve requirement 10
• The next slide simulates the first 13
  transactions as the initial 100 trickles
  throughout the economy

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3
The Simulation

• Suppose Andy deposits 100 at Bank 1. Bank 1 is
  free to loan out 90 of that 100, given that the
  reserve requirement is 10
• Bank 1 loans that 90 in excess reserves out to
  Bertha, who uses that to pay for her new car

4
The Simulation (contd)

• Her car distributors bank is Bank 2. Bank 2
  takes that money and deposits it into its
  checking account. Bank 2 is free to loan 81 of
  the 90.
• Charlie is also a member at Bank 2. Charlie
  needs to take out a loan for a home. Charlie
  borrows money from Bank 2. Charlie borrows 81
  from Bank 2.
• Charlie pays the homebuilder 81 for the home.
  The homebuilder is a member of Bank 3 and

5
The Simulation (contd)

• Charlie pays the homebuilder 81 for the home.
  The homebuilder is a member of Bank 3 and
• As you can see, the process continues until all
  of initial 100 is exhausted. The deposit
  expansion process is instrumental in increasing
  the American money supply.