14 - 1Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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How Banks and
Thrifts Create Money
C H A P T E R
14 - 2Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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BALANCE SHEET OF A
COMMERCIAL BANK
ASSETS = LIABILITIES + NET WORTH
The Goldsmiths
Fractional Reserve Banking
System
Money Creation & Reserves
Bank Panics & Regulation
14 - 3Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 1
Creating a bank$250,000 Cash
forCapital Stock
14 - 4Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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Cash $250,000 Capital Stock $250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
Deposit Added to Vault Cash
14 - 5Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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Cash $250,000 Capital Stock $250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 2
Acquiring Property andEquipment
$240,000 Cash
14 - 6Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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Cash $ 10,000Property 240,000
Capital Stock $250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
14 - 7Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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Next
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End
Show
Cash $ 10,000Property 240,000
Capital Stock $250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 3
AcceptingDeposits
$100,000 Cash
14 - 8Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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Cash $110,000Property 240,000
Checkable Deposits $100,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
14 - 9Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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Next
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End
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Cash $110,000Property 240,000
Checkable Deposits $100,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
NOTES:Bank deposits aresubject to a reserverequirement.
Reserveratio
Commercial bank’srequired reserves
Commercial bank’scheckable-depositliabilities
=
14 - 10Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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End
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Cash $110,000Property 240,000
Checkable Deposits $100,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
Three Important Issues...
1 - Excess Reserves = Actual Reserves -Required Reserves(assume 20% reserve requirement)$110,000 - 20,000 = $90,000
2 - Control3 - Asset and Liability
14 - 11Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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End
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Cash $110,000Property 240,000
Checkable Deposits $100,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 4
Depositsat the FED
$110,000 Cash
14 - 12Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
Previous
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End
Show
Cash $ 0Reserves 110,000Property 240,000
Checkable Deposits $100,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
14 - 13Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
Previous
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Next
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End
Show
Cash $ 0Reserves 110,000Property 240,000
Checkable Deposits $100,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 5
A check is drawn against the bank$50,000
14 - 14Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
Previous
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Next
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End
Show
Cash $ 0Reserves 60,000Property 240,000
Checkable Deposits $ 50,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
14 - 15Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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Next
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End
Show
Cash $ 0Reserves 60,000Property 240,000
Checkable Deposits $ 50,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
NOTES:Banks create moneyby lending excessreserves and destroyit by loan repayment.Purchasing bondsfrom the public alsocreates money.
14 - 16Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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End
Show
Reserves $ 60,000Property 240,000
Checkable Deposits $ 50,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 6
Make a loan from excess reserves$50,000
14 - 17Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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Reserves $ 60,000Loans 50,000Property 240,000
Checkable Deposits $100,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
Making the loancreated money!
14 - 18Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
Previous
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Next
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End
Show
Reserves $ 10,000Loans 50,000Property 240,000
Checkable Deposits $ 50,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
After a check for the $50,000is drawn against the bank
14 - 19Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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Show
Reserves $ 10,000Loans 50,000Property 240,000
Checkable Deposits $ 50,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 7
Repaying a loan with cash$50,000
14 - 20Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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Reserves $ 10,000Loans 0Property 240,000
Checkable Deposits $ 0
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
$50,000 in money supplyis destroyed!
14 - 21Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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Reserves $ 60,000Securities 50,000Property 240,000
Checkable Deposits $100,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 8
(Assume previous balance sheet)Buy GovernmentSecurities
$50,000
14 - 22Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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End
Show
Reserves $ 60,000Securities 50,000Property 240,000
Checkable Deposits $100,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
Bankers pursue two conflicting goals:Profits and Liquidity
Note use of Federal Funds Market...Note use of Federal Funds Market...Note use of Federal Funds Market...Note use of Federal Funds Market...Federal Funds RateFederal Funds RateFederal Funds RateFederal Funds Rate
14 - 23Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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MULTIPLE DEPOSIT EXPANSION PROCESS
BankAcquired reserves
and depositsRequiredreserves
Excessreserves
Amount bankcan lend - Newmoney created
ABCDEFGHIJKLMNOther banks
$100.0080.0064.0051.2040.9632.7726.2220.9816.7813.4210.748.596.875.5021.97
$20.0016.0012.8010.248.196.555.244.203.362.682.151.721.371.104.40
$80.0064.0051.2040.9632.7726.2220.9816.7813.4210.748.596.875.504.4017.57
$80.0064.0051.2040.9632.7726.2220.9816.7813.4210.748.596.875.504.4017.57
$400.00Total amount of money created by the banking system
14 - 24Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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MULTIPLE DEPOSIT EXPANSION PROCESS
BankAcquired reserves
and depositsRequiredreserves
Excessreserves
Amount bankcan lend - Newmoney created
ABCDEFGHIJKLMNOther banks
$100.0080.0064.0051.2040.9632.7726.2220.9816.7813.4210.748.596.875.5021.97
$20.0016.0012.8010.248.196.555.244.203.362.682.151.721.371.104.40
$80.0064.0051.2040.9632.7726.2220.9816.7813.4210.748.596.875.504.4017.57
$80.0064.0051.2040.9632.7726.2220.9816.7813.4210.748.596.875.504.4017.57
$400.00Total amount of money created by the banking system
Money
destruction works
in exactly the same
multiple way!
14 - 25Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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Maximumcheckable-deposit
expansion= Excess
reserves x MonetaryMultiplier
MonetaryMultiplier Required reserve ratio
1
=
THE MONETARY MULTIPLIER
14 - 26Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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$20Requiredreserves
$100New reserves
$100InitialDeposit
$400Bank system lending
Money Created
$80Excessreserves
OUTCOME OF MONEY EXPANSION
14 - 27Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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$20Requiredreserves
$100New reserves
$100InitialDeposit
$400Bank system lending
Money Created
$80Excessreserves
OUTCOME OF MONEY EXPANSION
Leakages exist...Leakages exist...Leakages exist...Leakages exist...Currency Drains
Excess Reserves
14 - 28Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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Need for
Monetary Control
Chapter ConclusionsChapter ConclusionsChapter ConclusionsChapter Conclusions
ENDBACK
balance sheet
fractional reserve system
vault cash
required reserves
reserve ratio
excess reserves
actual reserves
Federal funds rate
monetary multiplier
Copyright McGraw-Hill/Irwin, 2002
14 - 30Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
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End
Show
Next...
Monetary Policy
Chapter 15Chapter 15Chapter 15Chapter 15
Recommended