1. Our bank Assets Liabilities + Net Worth Cash $ 1 million Net worth$1 million

2. We buy a building, equipment and invest in government securities Assets Liabilities + Net Worth Building etc. $.5 million Net worth$1 million Gov’t Secs $.5 million

3. We attract a million in new checking accounts Assets Liabilities + Net Worth Building etc. $.5 million Net worth$1 million Gov’t Secs $.5 million CIPC $1 million New deposits in checking $1 million

4. Checks clear against other banks. Our deposits at the Chicago FED rise to 1 million Assets Liabilities + Net Worth Building etc. $.5 million Net worth$1 million Gov’t Secs $.5 million Deposits at FED $1 million New deposits in checking $1 million

5. Relying on new deposits to cover withdrawals we lend out and invest the 1 million at the FED Assets Liabilities + Net Worth Building etc. $.5 million Net worth$1 million Gov’t Secs $.5 million Deposits at FED $1 million New deposits in checking $1 million Loans etc. $1 million Initial 1 million in checking

6. The new checks from loans made written to other banks and start to clear against our bank at the FED Assets Liabilities + Net Worth Building etc. $.5 million Net worth$1 million Gov’t Secs $.5 million Deposits at FED $0 Loans etc. $1 million Initial 1 million in checking

7. Note that the balance sheet balances. But still we are taking an awful gamble. What is the gamble? The gamble is that new deposits will be just enough to cover current withdrawals.

8. If we are wrong we’ll be in big trouble! We’ll have to call back in old loans and sell off old investments to raise needed cash.

9. The required reserve ratio This is the percent of funds deposited in checking that HAVE to be held either at the district FED or as vault cash.

10. Banks would hold reserves regardless But they would not tend to hold sufficient reserves in bad times.

11. This at root is why there is a required reserve ratio in our system. Given a 10% ratio our balance sheet would look like the following: Assets Liabilities + Net Worth Building etc. $.5 million Net worth$1 million Gov’t Secs $.5 million Deposits at FED $1,000,000 Loans etc. $.9 million Initial 1 million in checking An additional.9 million

12. As the new checks from loans made written to other banks and start to clear against our bank at the FED our balance sheet would look like the following: Assets Liabilities + Net Worth Building etc. $.5 million Net worth$1 million Gov’t Secs $.5 million Deposits at FED $100,000 Loans etc. $.9 million Initial 1 million in checking