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BALANCE SHEET OF A
COMMERCIAL BANK
ASSETS = LIABILITIES + NET WORTH
The Goldsmiths
Fractional Reserve Banking
System
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Money Creation & Reserves
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Bank Panics & Regulation
FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
TRANSACTION 1
Creating a bank
$250,000 Cash
for
Capital Stock
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
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Deposit Added to Vault Cash
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
TRANSACTION 2
Acquiring
Property and
Equipment
$240,000 Cash
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
Accepting
Deposits
$100,000 Cash
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
Cash NOTES:
$110,000 Checkable
Property 240,000 Deposits $100,000
Bank deposits are
Capital Stock 250,000
subject to a reserve
requirement.
Commercial bank’s
required reserves
Reserve
ratio = Commercial bank’s
checkable-deposit
liabilities
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
Deposits
at the FED
$110,000 Cash
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
Cash $ 0 Checkable
Reserves 110,000 Deposits $100,000
Property 240,000 Capital Stock 250,000
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
Cash $ 0 Checkable
Reserves 110,000 Deposits $100,000
TRANSACTION
Property 240,0005 Capital Stock 250,000
A check is
drawn against
the bank
$50,000
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
Cash $ 0 Checkable
Reserves 60,000 Deposits $ 50,000
Property 240,000 Capital Stock 250,000
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
Cash NOTES:
$ 0 Checkable
Reserves 60,000 Deposits $ 50,000
Property Banks240,000
create money
Capital Stock 250,000
by lending excess
reserves and destroy
it by loan repayment.
Purchasing bonds
from the public also
creates money.
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
Make a loan
from excess
reserves
$50,000
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
Repaying a
loan with cash
$50,000
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
(Assume previous
balance sheet)
Buy Government
Securities
$50,000
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FORMATION OF A
COMMERCIAL BANK
LIABILITIES AND
ASSETS NET WORTH
1
Monetary
Multiplier = Required reserve ratio
Maximum
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checkable-
deposit = Excess
reserves x Monetary
Multiplier
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OUTCOME OF MONEY EXPANSION
$100
New reserves $20
$80 Required
Excess reserves
reserves
$400 $100
Initial
Bank system lending Deposit
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OUTCOME OF MONEY EXPANSION
$100
New reserves $20
$80 Required
Excess reserves
Leakages exist...
reserves
Currency Drains
Excess Reserves $100
$400
Initial
Bank system lending Deposit
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Need for
Monetary Control
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balance sheet
fractional reserve system
vault cash
required reserves
reserve ratio
excess reserves
actual reserves
Federal Funds rate
monetary multiplier
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