Reply To: Is Fractional Reserve Banking Inflationary.. or not really?


When one person pays another person by writing a check or swiping a debit card, the claim to money itself that the first person had is now transfers to the second person. The customer who buys the croissant sees his checking account balance fall by $2.50 while the merchant who sells the croissant sees his checking account balance rise by $2.50. The overall amount of claims to money has stayed the same. If the customer and the merchant use the same bank, then the reserve position of the bank stays the same. If they use different banks, then the bank with expanding checking accounts will need to acquire reserves from the bank with contracting checking accounts. The expanding bank can sell securities to the contracting bank to obtain its reserves. Alternatively, the expanding bank could borrow reserves from the contracting bank. This is done everyday in the so-called Federal Funds Market. As long as expanding banks can acquire reserves from contracting banks, the money stock need not shrink when one bank experiences contracting checking account balances.