How the banks create money

[Sceptic-PK]

Banks don't create "loans from nothing". They make loans based on their reserves (hence the reserve requirement, duh). The idea that banks just invent money is ludicrous- ever see a bank collapse? Why don't they just invent money out of thin air?

 

[tensordyne]

Finsend, sorry for not responding to each of your new posts, seems like you use a kind of extemporaneous style of writing that shows your developing thought. Unfortunately I am much slower in my own writing style. It also looks like you have answered many of your own questions (with answers I agree with it seems).

Questions

I was wondering banks cannot create new loans based on old loans can they?
I mean if I take a loan at the bank, I get a debt/IOU/liability account and a credit account, but this credit account does not count as a new deposit for the bank to create new loans with, does it? I think not.

New bank loans do lead to other loans being able to be created.

But when I goto the ATM and get the credit of my account and deposit into another bank, can this bank then can create new loans with that money I deposited? I think so.

Correct. The reserve requirement is a legal requirement. A bank is supposed to have a certain percent in reserve to be able to create amounts of new loan money, which are not to exceed the reserve ratios.

 

[psionl0]

Questions

I was wondering banks cannot create new loans based on old loans can they?
I mean if I take a loan at the bank, I get a debt/IOU/liability account and a credit account, but this credit account does not count as a new deposit for the bank to create new loans with, does it? I think not.

But when I goto the ATM and get the credit of my account and deposit into another bank, can this bank then can create new loans with that money I deposited? I think so.

Since this is a relatively easy question to deal with, I will give a quick answer now. First consider what happened before computers:

Customer A writes a cheque against his account at Bank A and gives it to customer B who deposits it in Bank B. Bank B then goes to Bank A to "cash in" the cheque. This means that Bank A transfers some of its reserves to Bank B.

So Bank B has its reserves and customer B's bank account increased by the amount of the cheque. This means that Bank B has excess reserves and can create money for new loans. However, Bank A's reserves and its customer A's bank account have decreased by the same amount and Bank A has insufficient reserves. So Bank A has to decrease the amount of money it has in loans. The two banks balance each other out.

The same process occurs in electronic banking except that the computers do the work. Rather than having any cash trucked between banks, it is a bank's reserve account it holds with other banks that gets altered.

 

[psionl0]

Whoops! Double post.

 

[Finsend]

Hi psionI0,

Since this is a relatively easy question to deal with, I will give a quick answer now. First consider what happened before computers:

Customer A writes a cheque against his account at Bank A and gives it to customer B who deposits it in Bank B. Bank B then goes to Bank A to "cash in" the cheque. This means that Bank A transfers some of its reserves to Bank B.

So Bank B has its reserves and customer B's bank account increased by the amount of the cheque. This means that Bank B has excess reserves and can create money for new loans. However, Bank A's reserves and its customer A's bank account have decreased by the same amount and Bank A has insufficient reserves. So Bank A has to decrease the amount of money it has in loans. The two banks balance each other out.

The same process occurs in electronic banking except that the computers do the work. Rather than having any cash trucked between banks, it is a bank's reserve account it holds with other banks that gets altered.

Thanx for that.
I think/hope I understand (most) of what you wrote.

But I was thinking about something else maybe, maybe you meant this, I am not sure.
I use your example but add this:

At the start Customer A has not money and takes a LOAN with Bank A, so he gets a credit account and must pay back to Bank A (he has a debt to Bank A) (and this is also liability for Bank A if I understand correctly).

So now we go into your example but a little bit different -> CustomerA writes a check (or goes to ATM, does this matter? Is there a difference?) against his account at Bank A (he takes his loan/credit away from the account of Bank A) and he goes to Bank B and deposits it there. Maybe Bank B is in another country for example.

Now I was wondering can Bank B now create a new loan to say Customer X using the deposit of Customer A (which was a loan he took at Bank A) as reserve? - without Bank A knowing anything of this? Using FRB system. Does this deposit of Customer A count as new reserve for Bank B so that it can use this extra reserve to create new/more loans?

I think it can, but I am not very sure...

 

[Finsend]

Banks don't create "loans from nothing". They make loans based on their reserves (hence the reserve requirement, duh). The idea that banks just invent money is ludicrous- ever see a bank collapse? Why don't they just invent money out of thin air?

I think I agree with this - banks need money first to create new loans and they have obligations to depositors/savers/etc so I agree it does not come form "completely nothing" - there has to be some money first and 'the borrowing of the future / investment-thing' I also understand I think - they do not lend out money (most of the time) if they do not expect some return (pay back+interest, etc) sometimes they make mistakes probably (bad loans) but not all the time I guess/hope

On the other hand I can imagine that some people say or look at it in a way that banks 'create money out of nothing' it seems a bit like this and in a way they create IOU/loans/etc 'out of nothing' in a way that they multiply the money/credit that is in their vaults/cpu's by creating these loans... (within the rules of FRB)

I think it is a bit a matter of how you describe it/see it. But I think we all agree that banks need some money first to be able to create new loans (new credit) and that this is not 'completely nothing' - they take a risk as well - I mean the borrower could default and this is not nothing, this risk...

And what you say that they cannot print money/use cpu etc when they are in trouble to fill up the gaps/solve debt problems points out that commercial banks cannot just create money out of thin air like in printing, etc - these loans,the credit is of course 'real money' but it is different than just printing money and having totally free new fresh money (like the FED/gov can do, I guess(?) - they have the monopoly on printing and creating the 'real money' without any debts etc sticking to it - but they should think about inflation and other things so they cannot print ********* of money all the time, etc...

Something like that Hope you understand what I am trying to say here despite my crappy english

SO (from my point of view) - the 'out of nothing' printed/created money by the FED/gov is different than the money/debt created by commercial banks!

Although it is both money which you can use and in a way the same as you goto ehm Wallmart or where-ever...

Is this - more or less - correctly stated? I hope so
Maybe this is some of the confusion I and others might have now and then?

 

[Finsend]

Finsend, sorry for not responding to each of your new posts, seems like you use a kind of extemporaneous style of writing that shows your developing thought. Unfortunately I am much slower in my own writing style. It also looks like you have answered many of your own questions (with answers I agree with it seems).

Oh [email protected]!I I am a Dutch painter so not so good with (english) words, I guess

Feel very free to cherry pick and/or skip/ignore whatever you like!
I do the same most of the time And I know I write long and bad unreadable English most of the time, so I am just happy if people try to read some of it at all and take the time to respond some time!

I hope indeed I get some more (slowly) about this money thing, but I get confused very soon if it gets complicated I am afraid, I loose the overview, etc... We all do this in our own ways and I think it is good to try to understand more of this and talk about it! And I will try to write shorter and better English but I am afraid it will take some time, I will try to use more BOLD, etc now to highlight the more important things so you all can speed read some more within my general gibberish!

Anyway ---->

Originally Posted by Finsend
I was wondering banks cannot create new loans based on old loans can they?
I mean if I take a loan at the bank, I get a debt/IOU/liability account and a credit account, but this credit account does not count as a new deposit for the bank to create new loans with, does it? I think not.

New bank loans do lead to other loans being able to be created.

Yeah, I am still not very sure, but I am now guessing/believing that this is the case ...
That loans created by bankA lead to new loans created by BankB (if the borrower deposits his credit (the loan from bankA) at BankB...

But this way (in this FRB system) it could get way out of hand, could it not? I mean, loans and debt everywhere? I am not sure, but I get this feeling sometimes... and lose the overview/etc... it gets to complex - to many factors / things / banks / loans / credits / debts /etc /etc... and I lose my 'understanding' (the little I have) of it.... it seems.

---->
Originally Posted by Finsend
But when I goto the ATM and get the credit of my account and deposit into another bank, can this bank then can create new loans with that money I deposited? I think so.

Correct. The reserve requirement is a legal requirement. A bank is supposed to have a certain percent in reserve to be able to create amounts of new loan money, which are not to exceed the reserve ratios.

Ok, so you think this as well...

But can this get out of control (with the interest part added/etc) and HOW exactly does it get out of control? Is that the case nowadays in some places and is this by accident or not so much? etc

What have these things to do EXACTLY with the current situation and how could it be fixed (if needed)? what needs to be changed and why? Etc.

I mean I see some advantages as well in FRB - credit can go out in society and people can borrow and start business etc which is useful (of a good business, etc)...

Besides this, we have this system now, and if it goes down hard will that be good for most people? etc.

So I do not seem to be able to write down very good when it gets bad and maybe harmful to society - so when the advantages are less than the disadvantages... And this is what I would like to do. And there will be more (complex) factors as well, I guess, probably even (more) things I never even heard of...

So in a way I seem to see problems, can describe/understand some of them and same for advantages, but it is not the whole picture yet... I feel this way Sometimes I also think some bankers are maybe doing some kind of conpiracy (maybe not a very big one, I don't know really) and are getting rich of other peoples backs/etc harming society. But probably not all of them and maybe just a few, I dunno. And some people here as well say, ah that is nonsense, etc don't be fooled by fools etc.. they do not understand it, etc... so I don't know and try to figure it out.

Anyway, one step at the time for me I guess

 

[psionl0]

At the start Customer A has not money and takes a LOAN with Bank A, so he gets a credit account and must pay back to Bank A (he has a debt to Bank A) (and this is also liability for Bank A if I understand correctly).

So now we go into your example but a little bit different -> CustomerA writes a check (or goes to ATM, does this matter? Is there a difference?) against his account at Bank A (he takes his loan/credit away from the account of Bank A) and he goes to Bank B and deposits it there. Maybe Bank B is in another country for example.

Now I was wondering can Bank B now create a new loan to say Customer X using the deposit of Customer A (which was a loan he took at Bank A) as reserve? - without Bank A knowing anything of this? Using FRB system. Does this deposit of Customer A count as new reserve for Bank B so that it can use this extra reserve to create new/more loans?

It is still the same thing.

When Customer A makes a withdrawal from Bank A, Bank A's reserves go down and Bank A has to do something about it. It makes no difference whether Customer A made a withdrawal via EFTPOS, ATM, cheque or over the counter. It also doesn't make a difference if Customer A originally deposited money into the bank or if the money in his bank account is purely from money created by Bank A when it loaned the money to Customer A.

Bank B has no knowledge (nor does it need any) of the source of the money that is deposited in it. If its reserves go up then it can create more money.

Essentially, no matter how it is done, if money is transferred from one bank to another then one bank's reserves go up and the other bank's down. They cancel each other out.

 

[Finsend]

It is still the same thing.

Ok, I can imagine this - a bit, I guess/hope

When Customer A makes a withdrawal from Bank A, Bank A's reserves go down and Bank A has to do something about it.

But not (immediately) if they (still) have enough reserves (?)

It makes no difference whether Customer A made a withdrawal via EFTPOS, ATM, cheque or over the counter.

I think I agree - it does not matter (for this example and we do not care about trucks carrying the money or computers passing it around for now - in this example!

It also doesn't make a difference if Customer A originally deposited money into the bank or if the money in his bank account is purely from money created by Bank A when it loaned the money to Customer A.

This is a bit of a difference for me, I guess... I mean it is a difference for me if that the money which was deposited was coming straight from the FED for example (form the press or if it comes from another bank(loan/debt from some guy to another bank) - from another debt you might say - hard to write this down for me.

Ehm... It feels different for me whether the money deposits (and thus the future newly created credit/debt) are coming from other created debts or from newly injected money for example, but this could be just a feeling... I have the feeling that these are a bit different kinds of money (printed and credit-debt-loans created) but I might be wrong - I suppose I see it has some kind of different effect on the system / the economy, but I could be wrong... I mean when new money is created from the printing press OR it is created by creating new loans (debt) first and then lateron some more it seems there is some difference for me... the newly created loans/money have a different origin - I think. And so maybe the future effects (of creating new loans/debts/credit/money) are also different?

I mean a new loan/debt created based on an old one seems different than one created based on savings?
'Different effects' maybe for the future of the bank and all the banks together / economy as a whole?

I cannot write this very well, but in the case of creating debts on top of old debts (or better - out of old debts/credits/etc) feels different than creating new loans/debts/money from hard cash (real money created and or nor-loan money - hmm I don't know how to say this - hope you understand what I mean here for just a bit.

Bank B has no knowledge (nor does it need any) of the source of the money that is deposited in it. If its reserves go up then it can create more money.

Essentially, no matter how it is done, if money is transferred from one bank to another then one bank's reserves go up and the other bank's down. They cancel each other out.

But doesn't it make a difference (for the whole system) whether the money deposited was another loan or some new money for example (or money which was not a debt)?

Understand (I hope) that it makes no difference for this bankB - it can create the new loan/credit anyway where-ever the deposit came from, etc. But still doesn't ik make a difference for the system whether the deposit was a debt (loan) from some guy at another bank - or if it was savings (no debt) which was deposited - with regards to the position of the bankB - I mean if it was a debt and this uy was in trouble that would give trouble for bankB wont it? BUT and if it was a savings (not a loan) it would not give trouble for bankB because if this guy did not have to pay back bankA etc... (I probably mess up bankA/B) still hope you understand what I am trying to say here.

Maybe I misunderstand somethings / maybe mixing up things and/or maybe we are talking about different things.
I will think about this some more! thanx for the reply!

F

 

[tensordyne]

give me a Q... give me a... what does that spell? QUOTE!

Banks don't create "loans from nothing". They make loans based on their reserves (hence the reserve requirement, duh). The idea that banks just invent money is ludicrous- ever see a bank collapse? Why don't they just invent money out of thin air?

"Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts."

That is from a publication given out by the Federal Reserve about banking, fractional reserve banking in particular. Let me break it down some.

1. "Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created."

The first two sentences are saying a number of things.

The first sentence says that where ever the money is coming from for a loan (created, stolen, what have you), it is definitely not coming out of deposit accounts or "deposits".

The second sentence says that additional money is created when a loan is made.

2. "What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts."

Now we know where the money that is created comes from. Banks credit a borrower's transaction account (i.e. the bank just adds in money to the account without the money coming from another account) in exchange for a promissory note, an IOU signed by the borrower.

Now, the amount of loans a bank can make to create more money is dependent on how much money a bank already has, also known as "reserves".

As for the banks collapsing, if only. We have quite a few zombie banks right now that should have collapsed but have not for various reasons.

finsend I like your picture for your account. Looks like cave drawings and it has a thereanthrope or "man-beast". The people who originally drew it (or inspired it) were probably high as a kite at one time off of DMT.

 

[psionl0]

I cannot write this very well, but in the case of creating debts on top of old debts (or better - out of old debts/credits/etc) feels different than creating new loans/debts/money from hard cash (real money created and or nor-loan money - hmm I don't know how to say this - hope you understand what I mean here for just a bit.

It's like I said, if money is transferred from a customer's bank account to another customer's account in a different bank then the two banks cancel each other out because the total amount of reserves of the two banks added together are still the same (ditto for the customer accounts).

To see how it works with new money, you need to be aware that governments finance their deficits by selling bonds (ie borrowing). The Fed creates money by buying bonds. (Ironically, although it is known as the federal reserve, the Fed has no reserves and is not constrained by the reserve ratio).

To see how it is done the old fashioned way, we assume that the Fed pays for the bonds it buys with a cheque (the money for this cheque came from "thin air"). The bond seller then deposits the cheque at his bank and has his account balance increased. His bank, in turn, clears the Fed's cheque and its reserve account with the Fed is increased by the amount of the cheque.

So far as the bank is concerned, this is identical to what happens when any customer makes a deposit (except that it is the bank's reserve account with another bank rather than the Fed that is increased). The difference is that there is no Bank A that has to reduce its reserves. The total of the banks' reserves have been increased so a new round of money creation starts.

Now you can see why the government can't create money to finance its deficits. For a $2T deficit, the Fed would have to sell $2T in bonds to balance the budget. However, the banks would then be able to create up to $18T in new loans - more than the entire national debt.

 

[Finsend]

Off topic

finsend I like your picture for your account. Looks like cave drawings and it has a thereanthrope or "man-beast". The people who originally drew it (or inspired it) were probably high as a kite at one time off of DMT.

Thanx, but it is not one of my own pictures - I might change this in the future maybe one of my paintings - for now it is ok - it is just one of the standard one I liked and could choose after getting to 50+ posts I think! I liked it as well and I'm sure some of those ancient painters were high as a kite, geheheh not all the time and not all of them maybe.

I'm not of course ok I drink a beer sometimes, etc, just like most us presidents and (amost) everybody else I guess

Anyway off topic this and today I have a feeling I should watch out for this, because of some other thread... because some people - besides complaining I am stupid and/or write bad English (which I agree on) - complain I write lots of off topic things, which is in my opinion not the case - certainly not most of the time - but now it was, so sorry for that - if needed.

Anyway I just leave it at this with regards to this (off) topic, but thanx for saying you liking it!

 

[Finsend]

Forget this.
I do this again.

Can/should I delete this post?
How? I don't see delete button?

 

[Finsend]

In between question

Just to make things more clear:

Congress
US Treasury
FED = Central Bank

These are all 100% part of the US Government, aren't they?

They just have different tasks.

Congress makes the plans, laws, etc.

The US Treasury guard the treasury, collect taxes, etc and things like that.
And I read the US Treasury has a bank account at the FED and if congress wants money they goto the US Treasury and they go to the FED, etc.

The FED is the Central Bank of America and they create the money or destroy it and set the interest rates, etc - things like that.

Other Banks are not part of the US Government and there are no more other banks or government bodies who have to do with money, are there?

It is not very clear for me what the exact difference is between US Treasury and FED and why there is both of them, but this does not matter for now.

 

[Finsend]

It's like I said, if money is transferred from a customer's bank account to another customer's account in a different bank then the two banks cancel each other out because the total amount of reserves of the two banks added together are still the same (ditto for the customer accounts).

To see how it works with new money, you need to be aware that governments finance their deficits by selling bonds (ie borrowing). The Fed creates money by buying bonds. (Ironically, although it is known as the federal reserve, the Fed has no reserves and is not constrained by the reserve ratio).

To see how it is done the old fashioned way, we assume that the Fed pays for the bonds it buys with a cheque (the money for this cheque came from "thin air"). The bond seller then deposits the cheque at his bank and has his account balance increased. His bank, in turn, clears the Fed's cheque and its reserve account with the Fed is increased by the amount of the cheque.

So far as the bank is concerned, this is identical to what happens when any customer makes a deposit (except that it is the bank's reserve account with another bank rather than the Fed that is increased). The difference is that there is no Bank A that has to reduce its reserves. The total of the banks' reserves have been increased so a new round of money creation starts.

Ok, I seem to understand this.
Cbank = Commercial Bank.

IF the GOV/Congress NEEDS MONEY they let the US Treasury issue/create TBonds and then the FED SELLS these TBONDS (to CBanks or other people) and the FED puts the money from the buyers into the US Treasury account.

Now the GOV has a DEBT - which has to be paid back at some time (to the Cbanks/Others/buyers of the TBonds) and GOV has to pay INTEREST as well.

IF the FED wants to CREATE NEW MONEY they BUY (back?) (T?)BONDS (from whoever wants to sell them) and the FED PAYS for these with NEWLY CREATED MONEY out of nowhere - by simply creating CHEQUES or by just by INCREASING the numbers of the Fed-ACCOUNTS of the CBanks. They can just change numbers on the money-account-computers

Hope this is correct.
Then I would understand this part!

 

[Finsend]

Now you can see why the government can't create money to finance its deficits.
For a $2T deficit, the Fed would have to sell $2T in bonds to balance the budget.
However, the banks would then be able to create up to $18T in new loans - more than the entire national debt.

Now this part is more difficult for me.

Let's say the GOV has a DEFICIT of $2T.
And it simply wants this debt be erased by creating new money.

It could:

A. Let the FED print $2T money and put it the the US Treasury
or just let the FED change the numbers in the US treasury account - so minus $2T would become 0.

This is fresh New Money totally created out of thin air and No Debt is made.

Why is this not a good option?
Inflation?

B. Let the FED SELL $2T in TBONDS - FED gets $2T from buyers and puts it into UST account - so -$2T will become $0.

No new money created - Debt is made by GOV + interest has to be paid by GOV.

C. ?


The CBanks would not get extra reserves in one of these cases.
If B then the CBanks would have lots of TBonds - or Some guys have them.
The interest would be paid off and this would increase the reserves of CBanks (a little).


X. IF the FED would create new money by BUYING (T)BONDS with newly created money (out of thin air) this new money would not end up in the US Treasury, but at the CBanks (which could then create huge amounts of new loans) - so this does not help the GOV in reducing the deficit.

So as I understand the government could let the FED create new money to solve it's deficits, but only using option A (?) which would cause problems like ?

Hope (most of this) is correct, if so I seem to get some understanding of this.

 

[Sceptic-PK]

"Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts."

That is from a publication given out by the Federal Reserve about banking, fractional reserve banking in particular. Let me break it down some.

1. "Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created."

The first two sentences are saying a number of things.

The first sentence says that where ever the money is coming from for a loan (created, stolen, what have you), it is definitely not coming out of deposit accounts or "deposits".

The second sentence says that additional money is created when a loan is made.

2. "What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts."

Now we know where the money that is created comes from. Banks credit a borrower's transaction account (i.e. the bank just adds in money to the account without the money coming from another account) in exchange for a promissory note, an IOU signed by the borrower.

Now, the amount of loans a bank can make to create more money is dependent on how much money a bank already has, also known as "reserves".

As for the banks collapsing, if only. We have quite a few zombie banks right now that should have collapsed but have not for various reasons.

Incorrect. I’ll let stevea explain it because he does so much more succinctly than I could.

Evidence !
Your link to the other thread [this one] shows some common erroneous thinking and exaggerated and inflammatory claims about reserve banking. The example ($1000 of "high powered money" resulting in $5000 in use with a 20% reserve ratio) does not in any way imply the creation of $4000 by banks. If for example individual A has $1000 available for loan, and B needs some money for a purpose a loan can be transacted. However A sets aside 20% under his mattress as a reserve, then loans $800 to B. B buys something from C with the $800. C puts 20% under his mattress in reserve and loans the $640 .... eventually we have the same exact sequences of transactions as for a reserve bank. There is total of $1000 stuffed under various mattresses around town, and there were $4000 of transactions & loans. No money was "created" - that sort of thinking seems the nub of the nonsense. The fact that the same dollar changes hands (circulates) repeatedly should not be confused with creating money. The reserve banking rate is only a restriction on how many times money can circulate through federal reserve bank deposit account.

It's true that if each of these loans has a "demand deposit" feature, then the possibility of a 'bank run'/loan_run exists when any 'loan creator' demands more than the 20% under his mattress. OTOH look at all the economic activity made possible by the creation of these loans. There should be a trade-off analysis.

The point should be obvious - the banking system pools risk of loan defaults, as opposed to individuals making these loans. It is not a risk-less investment to put money in a bank and never has been.

 

[tensordyne]

Incorrect. I’ll let stevea explain it because he does so much more succinctly than I could.

Both your entries in the past and the one quoted from stevea are arguments based on your own authority or revelation. There are no quotes from outside sources, reports of experiments or proofs based on mathematics.

As the banking system is a human-derived entity, the activities are governed by human rules of conduct. That means outside sources are what are needed in order to say just what these rules are. Quotes from prominent bankers on how banking operates, publications from banking authorities on how the system operates, that sort of thing is what is required.

The arguments given so far from the recent posts are "This is the way it is..."
Why? The implied reason is, "because I say it is," or "I have a hard time believing it could be any other way." Both are fallacious arguments.

I also noticed that instead of going over my quote (from the Federal Reserve!) you quote some person on this forum. Let me see, who will I go with? Find me some quotes from some banker or banking institution publication that says the kind of things you are saying and I would definitely consider it. The type of arguments used so far though do not persuade me in the least, one way or the other, on how fractional reserve banking works.

All the best to you all!

 

[psionl0]

Incorrect. I’ll let stevea explain it because he does so much more succinctly than I could.

(quotes from post #20)

Anybody who didn't know better might be tricked into believing that this was stevea's final word on the matter.

However, stevea also said:
"Obviously IOUs are trade-able." (post #31) and
"When the Fed prints new M0 "high powered money" then there is this "multiplier effect" in the amount of M1, M2 circulating." (post #33).

These quotes tend to contradict the assertion that "No money was "created".

 

[Sceptic-PK]

Well yeah, the explanation in MMM seems contrary to many explanations I’ve read over the years. It even contradicts what is stated in MMM earlier in the section, in that anything in excess of 10% can be loaned or invested. So they may lend $9K from the 10K deposit, but then they don’t really lend the money from deposits at all? Eh? If they don’t really lend deposits at all why must they keep a 10% reserve to satisfy demand for currency, surely they’d always have 100% of depositor money at hand?

I suspect that our inferences from that portion of MMM are simply incorrect and stevea’s comments are accurate as provided in the important part of post 31 you omitted:

No there isn't $1800 circulating at one time just b/c you insert a bank in the middle of the transaction. There is $200 under the mattress in reserve and 800 used twice - in successive transactions. You are confusing the deposit balance with cash.