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Best Links For Explaining How Banking/money Works (or Doesn't)

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Most of us are fairly poorly educated about what money is and where it comes from (and why it can suddenly disappear), including many bankers themselves, so it would seem.

I thought it would be good to start a collection of links that explain money and banking in simple terms. If anyone wants to discuss any of the fundamentals then please start a new thread, and just leave this one for the links.

This might help deal with the people who get so confused about fractional reserve banking, and the incredulous disbelief by many of the fact that most money is simply loaned into existence by the banks (ie as debt).

I'll kick off with this one: Khanacademy youtube Playlist: Banking and Money

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Federal reserve bank of Chicago. June 1992 edition.

Taking into consideration that a fractional reserve bank receiving a deposit can:

1. lending by retaining the required reserve of the deposit and lending the excess reserve which is what most of this document illustrates, Eg

100 deposit by customer A leads to 100 vault cash as property of Bank

100 created commercial bank money as an IOU to Customer A

Loan ID001 to buying cust B creates 100 commercial bank money to buy Cust C's 100 of products

Customer C 100 commercial bank money

100 reserve 200 created money deposits of commercial bank money for 50% Reserve


2. Expanding deposits using the deposit amount as the retained reserve without any requirement to have excess reserves available (see notes below from modern money mechanics)

100 deposit by customer A leads to 100 vault cash as property of Bank

100 created commercial bank money as an IOU to Customer A

Loan ID002 to buying cust B creates 900 commercial bank money to buy Cust C's 900 of products

Customer C 900 commercial bank money

100 reserve 1000 created money deposits of commercial bank money for 10% Reserve


3. Expanding the banks commercial bank money supply using no deposits or reserve.

No deposits and no reserves and no vault cash

Loan ID003 to buying cust B creates 100 commercial bank money to buy Cust C's 100 of products

Customer C 100 commercial bank money

0 reserve 200 created money deposits of commercial bank money for 0% Reserve


From modern money mechanics:

Page 24 Left hand column

Changes in Loans to

Depository Institutions

Prior to passage of the Monetary Control Act of 1980,

only banks that were members of the Federal Reserve System

had regular access to the Fed's "discount window."

Since then, all institutions having deposits reservable under

the Act also have been able to borrow from the Fed. Under

conditions set by the Federal Reserve, loans are available

under three credit programs: adjustment, seasonal, and extended

credit.16 The average amount of each type of discount

window credit provided varies over time. (See rlrn~-fi

When a bank borrows from a Federal Reserve Bank, it

borrows reserves. The acquisition of reserves in this manner

diem in an important way from the cases already illustrated.

Banks normally borrow adjustment credit only to avoid reserve

deficiencies or overdrafts, not to obtain excess reserves.

Adjustment credit borrowings, therefore, are

reserves on which expansion has already taken place. How

can this happen?

In their efforts to accommodate customers as well as to

keep fully invested, banks frequently make loans in anticipation

of inflows of loanable funds from deposits or money

market sources. Loans add to bank deposits but not to bank

reserves. Unless excess reserves can be tapped, banks will

not have enough reserves to meet the reserve requirements

against the new deposits. Likewise, individual banks may

incur deficiencies through unexpected deposit outflows and

corresponding losses of reserves through clearings. Other

banks receive these deposits and can increase their loans

accordingly, but the banks that lost them may not be able to

reduce outstanding loans or investments in order to restore

their reserves to required levels within the required time

period. In either case, a bank may borrow reserves temporarily

from its Reserve Bank.

Suppose a customer of Bank A wants to borrow $100.

On the basis of the management's judgment that the bank's

reserves will be sufticient to provide the necessary funds, the

customer is accommodated. The loan is made by increasing

"loans" and crediting the customer's deposit account. Now

Bank A's deposits have increased by $100. However, if reserves

are insufticient to support the higher deposits, Bank A

will have a $10 reserve deficiency, assuming requirements of

10 percent. See illustratlon 26. Bank A may temporarily

borrow the $10 from its Federal Reserve Bank, which makes

a loan by increasing its asset item "loans to depository institutions"

and crediting Bank A's reserve account. Bank A

gains reserves and a corresponding liability "borrowings from

Federal Reserve Banks." See illustratlon 2 7"

(Below are the illustrations reproduced by myself from modern money mechanics. The definative versions are in the document)

26 A bank may incur a reserve deficiency if it makes loans when it has no excess reserves


Assets................................................... Liabilities

Loans . ...........+ 100............. . . . . . Deposits . . . . . . . . +100

Reserves with F. R. Banks . . no change

(Required . . . . +10)

(Deficit . . . . . . . 10)

27 Borrowing from a Federal Reserve Bank to cover such a deficit is accompanied by a direct credit to the bank's reserve account


Assets................................................... Liabilities

Loans to depository institution

...............................................................Reserve accounts Bank A: +10

Bank A . . . . . . . . +10


Assets............................................................... Liabilities

Reserves with F.R. Banks . +10.................Borrowings from F.R. Banks +10

No further expansion can take place on the new reserves because they are all needed against the deposits created in step 26

Finally a link to a banking discussion on this board full of controversy philosophy and nonesense together with some expert comments by a person writing banking software


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