Modern Money Mechanics

A Workbook on Bank Reserves and Deposit Expansion

Federal Reserve Bank of Chicago

Page 10

7. Expansion continues as the banks that have excess reserves increase their loans by that amount, crediting borrowers' deposit accounts in the process, thus creating still more money.

8. Now the banking system's assets and liabilities have risen by 27,100.

9. But there are still 7,290 of excess reserves in the banking system.

10. As borrowers make payments, these reserves will be further dispersed, and the process can continue through many more stages, in progressively smaller increments, until the entire $10,000 of reserves have been absorbed by deposit growth. As is apparent from the summary table on page 11, more than two-thirds of the deposit expansion potential is reached after the first ten stages.

It should be understood that the stages of expansion occur neither simultaneously nor in the sequence described above. Some banks use their reserves incompletely or only after a considerable time lag, while others expand assets on the basis of expected reserve growth. The process is, in fact, continuous and may never reach its theoretical limits.

Page 11

Thus through stage after stage of expansion, "money" can grow to a total of 10 times the new reserves supplied to the banking system...

...as the new deposits created by loans at each stage are added to those created at all earlier stages and those supplied by the initial reserve-creating action.

Cumulative expansion in deposits on basis of 10,000 of new reserves and reserve requirements of 10 percent.

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