90 91
$
$
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