In your lecture on monetary policy you give an example of Friday’s bank. His reserves amount to 495000. Thus the bank can issue checkable deposits of 4,590,000 by making loans of 4,950,000.
I don’t see the connection between the loan and the checkable deposit. How does this work in reality? Does the commercial bank credit the borrower with an amount of money in a deposit. I’m somewhat confused.
When the bank loans money to its customers, it merely writes the funds into their checking accounts. As the customers write checks to transfer the funds, some of the transfers go to other customers of the bank. So the bank simple gauges the extent to which the total checkable deposits of all its customers reaches a level 10 times its reserves. At that point, its balance sheet would show 90 percent loans and 10 percent reserves as assets against its checkable deposit liabilities.
Thank you so much! I don’t know where you always find the time to answer my questions. I’m reading lots of books on Austrian Economics right now and because I’m having discussions with my teachers and friends I need to know exactly what I’m talking about. I just want you to know that your efforts are always appreciated and are of great help to me! Keep up the great work!