How_Money_Works_-_The_Facts_Visually_Explained

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$

$

B

D

$

A

GOVERNMENT FINANCE AND PUBLIC MONEY

The money supply

$

$

$

BANK A

$

$

BANK B

$

$1,000 is deposited in Bank A

by Customer A, and her account

is credited with $1,000.

Bank A holds $50 of this

deposit as a 5% reserve.

$950 of the

deposit is credited

to Customer B’s

account in the

form of a loan.

Customer B spends $950 in

businesses that eventually

deposit cash in Bank B.

Bank B holds $ 47. 5 0 of the $950

deposit as a 5% reserve.

$902.50 of the deposit

is loaned by Bank B to

Customer C.

Customer C spends $902.50

in businesses, which eventually

deposit cash in Bank C.

BANK C

Bank C holds $45.13 of

the $902.50 deposit

as a 5% reserve.

$8 57. 37 of $

the deposit

can now be

loaned out to

Customer D.

Customer D spends

$8 57. 37 in businesses

that eventually deposit

cash in Bank D.

BANK D

Bank D holds $42.87

of the $8 57. 37 deposit

as a 5% reserve, and

loans out $814.50.

Bank C holds

$45.13 in cash

reserves against

claims of

$1,759.87.

Bank D holds $42.87 in reserve

against claims of $1,671.87.

The initial $1,000 deposit has

been credited to two accounts

at once (bar the $50 reser ve), so

$950 is unbacked. Bank A holds

$50 in cash against claims of

$1,950—the deposit and loan.

The multiplier effect of the

fractional reserve cycle

Wealth is created by loaning out

most of a deposit. This original sum

is then multiplied many times over

as borrowers deposit their loan into

other banks, which, in turn, loan

money to yet more borrowers.

C

Bank B holds $ 47. 5 0 as

cash reserves against

claims of $1,852.50.

$

Reserves

$50.00

$47.50

$45.13

$42.87

$185.50

Loans

$950.00

$902.50

$8 5 7. 37

$814.50

$3,524.37

Deposits

$1,000

$950.00

$902.50

$8 5 7. 37

$3,709.87

Banks

A

B

C

D

Totals

The initial deposit of $1,000 results

in total claims (all deposits and loans)

of $7,234.24. The collective cash

reserve is $185.50.

$

THIS IS A SIMPLIFIED EXPLANATION OF THE MULTIPLIER EFFECT

US_090-091_Banking_Reserves.indd 91 13/10/2016 16:17