>>I've posed this question so many times, even to economists, and have
>>almost always gotten the wrong answer: ASSUMING A RESERVE REQUIREMENT
>>OF 10%, HOW MUCH ADDITIONAL MONEY CAN THE BANKING SYSTEM LEND, IF YOU
>>DEPOSIT 100 DOLLARS IN YOUR BANK?
>>The correct answer is 900. Please read that again: from your 100
>>dollar deposit, the banking system can lend a maximum of 900, not 90,
>Actually, both answers are wrong. Sort of. And both are right. Sort
As I said, until one appreciates why this is so, one underestimates
the power of banks to CREATE money. The 90 answer is not "sort of
right"; it is wrong, period.
The 900 answer is the maximum, as I was careful to point out. It is
not a "sort of wrong" answer, but the correct theoretical maximum.
If it isn't reached, it is because not all banks reach their maximum
target lending. But that simply means the banking system can lend more
until it reaches the theoretical maximum.
>Assume I earn US$1,000 in Peru (the foreign source is important here,
>since when I bring it into the States I'm *increasing* the money supply
>by exactly $1000 because it is *new* money to the economy). I deposit
>the $1,000 in currency in my local bank. Under a 10% reserve
>requirement, my bank can subsequently lend $900 to someone who uses it
>to buy a flat-panel computer screen.
This is not about bringing in money from abroad, but about local cash
deposited by local citizens. I repeat: from a *local* $100 deposit,
the banking system can lend a maximum of $900, given a 10% reserve
Understand why this is so, and you'd know the real secret of how banks
simply CREATE money. The rest are details.
I've been asked: then why do some banks fail? Banks fail because their
owners/managers are not happy enough making such easy money legally.
They get too greedy and do illegal things like lending to their own
companies and pocketing the cash, done elaborately of course to make
it seem legal.
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