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Give me a loan so there will be more DD in the system. How Banks Create Money [ MS ] MS = Currency + DD of Public Banks [thru loans] Create More DD.

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Presentation on theme: "Give me a loan so there will be more DD in the system. How Banks Create Money [ MS ] MS = Currency + DD of Public Banks [thru loans] Create More DD."— Presentation transcript:

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2 Give me a loan so there will be more DD in the system. How Banks Create Money [ MS ] MS = Currency + DD of Public Banks [thru loans] Create More DD

3 How Banks and Thrifts Create Money

4 RR Excess Reserves Total(Actual) Reserves PMC = M x ER, so 10 x.90 = $9 TMS = PMC[$9] + DD[$1] = $10 [ MS = currency + DD of public ] Dennis Rodman deposits $1 with A 10% RR cents One Dollar

5 Excess Reserves Total(Actual) Reserves PMC = M x ER, so 10 x $1 = $10 TMS [$10] = PMC[$10] [ MS = currency + DD of public ] Rodmans Bank Borrows $1 From The Fed [10% RR] RR One Dollar One Dollar One Dollar0 Rodmans Bank

6 BALANCE SHEET OF A COMMERCIAL BANK ASSETS [cash]LIABILITIES[DD] ASSETS [cash] = LIABILITIES[DD] [The cash is property of the bank] [liable, DDs are owed to depositors] Cash $100,000 DD $100,000 Goldsmiths The Goldsmiths F ractional R eserve B anking S ystem Money Creation & Reserves Bank Panics and Regulation

7 $1,000 DD by B rian [ M S=Currency+DD of Public ] Canon Sams Dell Target MS grows by a multiple of 5Katy , $1, $1, , Katy

8 Tammy $1,000 DD by Tammy [ M S = Currency + DD of Public ] MS grows by a factor of Tammy $9, 000 $1, $10, 000

9 Joe Biker 1. Joe Biker deposits $10, 000 in his bank. Suzie Rah Rah 2. Suzie Rah Rah borrows $8, 000 RR = 20% Suzie 3. Suzie pays $ 8, 000 for a new car. GoNow Auto deposits the $ in 2 nd Bank nd Bank lends Sports Shop $ 6, 400. $ 50, Eventually the MS will be $ 50, 000 Joe $ 10, 000 +$ 40, 000 =$ 50, 000 MS $ 10, 000 $ 8, 000 $ 18,000 MS $ 10, 000 $ 8, 000 $ 6, 400 $ 24, 400 MS = DD + Currency of the Public [A DD of $ 10, 000 will incr MS by another $ 40, 000 ($ 50, 000 MS ] RR=20% MS MS is $ 10, 000

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11 Most Famous Panic Run in Movie History

12 History of Deposit Insurance In 1934, federal deposit insurance made its debut at $2,500 $2,500 to protect the average familys savings and end the bank runs bank runs that had shut down businesses and contributed to the Great Depression Great Depression. Through the years the coverage rose $5,000 increments in $5,000 increments until the 70s until the 70s when it jumped to $40, In 1980, it was raised $100,000 to $100,000.

13 gold-smithy Once upon a time there was a gold-smithy who offered to store peoples gold in his vault. He issued paper receipts for the gold, and it was not long before the townsfolk used the paper to purchase eggs and beer. The smithys good as gold. paper receipts became as good as gold. not stupidI have 2000 ounces of gold Our Smithy was not stupid. He said to himself. I have 2000 ounces of gold stored in my vault, but in the last year I was never called upon to pay out 100 ounces more than 100 ounces in a single day. What harm could it do if I lent out say, half the gold half the gold I now have? Ill still have more than enough to pay off any depositors that come in for a withdrawal. No one will know the difference. I earn 30 additional ounces of gold could earn 30 additional ounces of gold each week. I think Ill do it. The smithy has invented the Fractional Reserve Banking System. Advantages of Lending Advantages of Lending [One disadvantage was the possibility of bank runs] 1. Depositors havent lost money [ Goldsmiths paid them instead of other way ] 2. With the interest you earned you could give some to depositors. 3. The loans benefited the community thru loans The fractional banking system began when someone issued claims for gold that already belonged to someone else. The Very Early Days Of Banking There were more claims to gold than there were ounces of gold. Wow, you mean we can create money out of thin air.?

14 Birth of a COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES AND NET WORTH TRANSACTION 1 Creating a bank $250,000 $250,000 Cash for Capital Stock

15 $250,000 Cash $250,000 $250,000 Capital Stock $250,000 FORMATION OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES AND NET WORTH Deposit Deposit Added to Vault Cash

16 $250,000 Cash $250,000 $250,000 Capital Stock $250,000 Birth OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES ANDNET WORTH TRANSACTION 2 Acquiring Property and Equipment 240,000 $240,000 Cash

17 $ 10,000 Cash $ 10, ,000 Property 240,000 $250,000 Capital Stock $250,000 Birth OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES AND NET WORTH Lovelady Bank

18 $ 10,000 Cash $ 10, ,000 Property 240,000 $250,000 Capital Stock $250,000 Birth OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES AND NET WORTH TRANSACTION 3 Accepting Deposits $100,000 $100,000 Cash $250,000 $250,000

19 $110,000 Cash $110, ,000 Property 240,000 $100,000 DD $100, ,000 Capital Stock 250,000 Birth OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES AND NET WORTH $10,000 Was $10,000

20 $350,000 $110,000 Cash $110, ,000 Property 240,000 $100,000 DD $100, ,000 Capital Stock 250,000 Birth OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES AND NET WORTH $10,000 Was $10,000 $350,000

21 $110,000 Cash $110, ,000 Property 240,000 $100,000 DD $100, ,000 Capital Stock 250,000 FORMATION OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES AND NET WORTH TRANSACTION 4 $50,000 A $50,000 check is written against the bank $350,000 $350,000

22 $ 60,000 Cash $ 60, ,000 Property 240,000 $ 50,000 DD $ 50, ,000 Capital Stock 250,000 Birth OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES AND NET WORTH Was$110,000 Was $110,000 $300,000$300,000

23 Birth OF A COMMERCIAL BANK In Lovelady, Texas NOTES: Banks create money by lending ER and destroy money by loan repayment. Purchasing bonds from the public also creates money.

24 $ 60,000 Cash $ 60, ,000 Property 240,000 $ 50,000 DD $ 50, ,000 Capital Stock 250,000 Birth OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES AND NET WORTH TRANSACTION 5 Make a loan from excess reserves $50,000 of $50,000

25 $ 60,000 Cash $ 60,000 50,000 Loans 50, ,000 Property 240,000 $100,000 DD $100, ,000 Capital Stock 250,000 FORMATION OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES AND NET WORTH Making the loan created money!

26 $ 60,000 Cash $ 60,000 0 Loans 0 240,000 Property 240,000 $ 50,000 DD $ 50, ,000 Capital Stock 250,000 Birth OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES AND NET WORTH $50,000 After a check for the $50,000 is written against the bank

27 (a) Joe Bozo pays Best Buy a $50,000 check Hateman Bank Lovelady Bank Dallas Big D Joe Bozo

28 $ 10,000 Reserves $ 10,000 50,000 Loans 50, ,000 Property 240,000 $ 50,000 DD $ 50, ,000 Capital Stock 250,000 Birth OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES AND NET WORTH TRANSACTION 6 Repaying a loan with cash$50,000

29 $ 10,000 Reserves $ 10,000 0 Loans 0 240,000 Property 240,000 0 DD $ 0 250,000 Capital Stock 250,000 Birth OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES AND NET WORTH $50,000 $50,000 in money supply is destroyed!

30 MULTIPLE DEPOSIT EXPANSION PROCESS RR= 20% Bank Acquired reserves and deposits Required reserves Excess reserves Amount bank can lend - New money created A B C D E F G H I J K L M N Other banks $ $ $ $ $ PM C P otential M oney C reation in the banking system TMS = $ st 10 $ 357 ofthe$400 Paris Hilton Susie RahRah Ronald McDonald Manuel Labor

31 Maximum checkable- deposit expansion = ER x DepositMultiplier RR 1 = THE DEPOSIT MULTIPLIER T he deposit m ultiplier is the reciprocal of the reserve requirement. Potential money Creation in the Banking System PMC [PMC] MDMDMDMD

32 $1,000 New reserves $ 1,000 Initial Deposit $ 4,000 PMC PMC thru bank lending $ 200 RR $800 Excess reserves Ashley Olsen Deposits $1,000 in her bank TMS = $5,000 Ashley Olsen $ 1,000 deposits $ 1,000 Money Created RR = 20%

33 New reserves $1,000 Excess Reserves $5,000 PMC PMC thru Bank Lending Fed Buys A $1,000 Bond From Ashleys Bank TMS is $ % RR

34 $20 Required reserves $100 New reserves $100 Initial Deposit $400 Bank system lending Money Created $80 Excess reserves OUTCOME OF MONEY EXPANSION Leakages exist... Currency Drains Excess Reserves

35 NS AP Econ [ MS = Currrency + DD of Public ] RR+ER=TR; TR-RR=ER; TR-ER=RR; M X ER =PMC ; PMC(Public)+DD=TMS; PMC(Fed)=TMS $40 billion depositDD 31. The $40 billion deposit of Currency into DD MS will result in MS staying at ($8/$40/$160) billion. $40 billion deposit 32. The $40 billion deposit of currency into ER checking accounts will create ER of ($20/$32/$40) billion. Potential Money Creation 33. The Potential Money Creation of the banking system Potential TMS through loans is ($40/$160/$$200) bil. The Potential TMS DD [all DD of the public] could be as much as ($40/$160/$200) 34. The RR applies to checkable deposits at (banks/S&Ls/ credit unions/ all depository institutions). ER of $6,000DD of $100, I f the D uck N ational Bank has ER of $6,000 & DD of $100,000 TRRR is 25% what is the size of the banks TR if the RR is 25%? ($25,000/$75,000/$31,000) [RR($____)+ER($___)+TR($____) Excess Reserves prior to new currency deposit ( DD ) = $0 Britney Spears deposits in the banking system = $40 billion Legal Reserve Requirement [RR] = 20% 25,000 6,000 31,000

36 NS AP Econ [ MS = Currrency + DD of Public ] deposits $1,000 RR of 10%. 36. A stranger deposits $1,000 in a bank that has a RR of 10%. The maximum possible change in the dollar value of the local banks loans would PMCM X ERPotential TMS be $______. PMC[M X ER] in the banking system is $_____. Potential TMS could become as high as $_______. DD of $100,000 RR is 10% 37. Suppose a commercial bank has DD of $100,000 and the RR is 10%. RR & ER are equalTR If the banks RR & ER are equal, then its TR are ($10,000/$20,000/$30,000). ER 38. Total Reserves (minus/plus) RR = ER. DD of $500,000 RR is 10% 39. Suppose the Thunderduck Bank has DD of $500,000 & the RR is 10%. ER of $4,000TR If the institution has ER of $4,000 then its TR are ($46,000/$54,000/$4,000). ERare $4,000 DD are $40,000 RR is 10% 40. If ER in a bank are $4,000, DD are $40,000, & the RR is 10%, then TR TR are ($4,000/$8,000). main purpose of the RR 41. The main purpose of the RR is to (have funds for emergency withdrawals/ influence the lending ability of commercial banks). check for $1 42. If I write you a check for $1 & we both have our checking accts at the Poorman Bank, the banks balance sheet will ( increase/decrease/be unchanged). make loansrepaying bank 43. Banks (create/destroy) money when they make loans and repaying bank loans loans (create/destroy) money. bank loan is repaidMS 44. When a bank loan is repaid the MS is (increased/decreased). Fed Funds rate 45. The Fed Funds rate is a loan by one bank (to another bank/from the Fed ). RR+ER=TR; TR-RR=ER; TR-ER=RR; M X ER =PMC ; PMC(Public)+DD=TMS; PMC(Fed)=TMS 9009,000 10,000

37 loans as cash 47. If borrowers take a portion of their loans as cash, the maximum amount by MS which the banking system increases the MS by lending will (increase/decrease). NS AP Econ [ MS = Currrency + DD of Public ] Leakages(limitations) of the Money Creating Process Leakages(limitations) of the Money Creating Process 1. Cash leakages [taking part of loan in cash] 1. Cash leakages [taking part of loan in cash] 2. ER (banks dont loan it or we dont borrow] 2. ER (banks dont loan it or we dont borrow] RR+ER=TR; TR-RR=ER; TR-ER=RR; M X ER =PMC ; PMC(Public)+DD=TMS; PMC(Fed)=TMS RR was lowered 46. If the RR was lowered [say, from 50% to 10%], the size of the monetary multiplier M M monetary multiplier [ M M] would (increase/decrease).

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