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<p>[QUOTE=&quot;justafarmer, post: 1314604, member: 3926&quot;]This so called money that is created out of thin air is not created by the central bank and its creation does not change the base money supply. In The United States the central bank is The Federal Reserve and the base money supply is Federal Reserve Dollars. Keep in mind all Federal Reserve Dollars are dollars but all dollars are not Federal Reserve Dollars. Technically when you deposit dollars into your bank, no matter what form of dollar you deposit, you are exchanging those dollars for a dollar that is a derivative of your bank. It doesn’t matter if the dollars you deposited were actual Federal Reserve Dollars or a derivative of another bank; the dollars you receive will be a derivative based on your bank’s reserve of Federal Reserve Dollars and your bank’s credit worthiness. Yes the money I have held in account at my bank are dollars but they are not Federal Reserve Dollars. Yes the money I have held in account at my bank is counted as part of the money supply but it is not counted as part of the base money supply. The only way my dollars held in account at my bank can be 100% representative of Federal Reserve Dollars is if my bank maintained a 100% reserve. Even if my bank maintained a 100% reserve my dollars in that bank would still be a derivative and not actual Federal Reserve Dollars. A highly secure derivative no doubt.</p><p><br /></p><p>In fractional reserve banking the maximum a bank can loan is set by the statutory minimum reserve requirement and a banks total deposits. The theoretical maximum the money supply can expand is set by a combination of the statutory minimum reserve requirement and the base money supply. The total base money supply (Federal Reserve Dollars in the US) is the maximum amount of money that can be held as reserve. The money supply multiplier can be determined using the following formula. (100% - the statutory minimum reserve requirement)/ the statutory minimum reserve requirement. </p><p><br /></p><p>Examples:</p><p>10% statutory minimum reserve requirement&nbsp; (100%-10%)/10% = a multiplier of 9. 100% of the base money supply x 9 equals the theoretical maximum the money supply can be expanded through fractional reserve banking.</p><p>20% statutory minimum reserve requirement (100%-20%)/20% produces a multiplier of 4.</p><p>5% statutory minimum reserve requirement (100%-5%)/5% produces a multiplier of 19.</p><p><br /></p><p>Remember it is a statutory MINIMUM reserve requirement. Banks are not allowed to hold less than this amount of customer’s deposits in reserve but it doesn’t prohibit banks from holding more than this amount of customer’s deposits in reserve. Being that banks can hold a reserve greater than the statutory minimum the maximum amount of money a bank can loan CANNOT be correctly or accurately expressed in terms using the bank’s actual reserve x the multiplier. Or as was suggested in a previous post 9x the bank’s reserve. The only time this equation would produce a correct result is when a banks actual reserve equaled the statutory minimum. You know what they say even a broken clock produces the correct time twice a day. As I wrote above the maximum amount a bank can loan is set by the statutory minimum reserve requirement in the following manner – (100% - the statutory minimum reserve requirement) x the banks total deposits.[/QUOTE]</p><p><br /></p>

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