Reply To: Fractional Reserve Banking


The reserve held by a bank is either cash or a deposit at the Federal Reserve. Suppose, then, that a bank has $1,000 in cash. It can extend a loan to a customer for $10,000 and credit the customer’s checking account for $10,000. The bank would be meeting a 10% reserve requirement. The customer’s checking account balance cannot serve as a reserve for another bank. Another bank would have to obtain either cash or a credit by the Federal Reserve to the bank’s account at the Fed. A bank normally does this by selling securities to the Fed.

Take a look at Murray Rothbard’s book, Mystery of Banking.