Comment by pdonis | Hacker News Reader

Comment by pdonis | Hacker News Reader

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> A 10% reserve requirement would mean that if you deposit $100, then your bank can then lend out $90 of it, not $1000.

I misstated it somewhat, yes. The $90 gets lent out--and where does it end up? In someone else's bank deposit. Then $81 of that gets lent out, and ends up--in yet another bank deposit. And so on...

At the end of this process, your original deposit has been multiplied by the reciprocal of whatever the reserve requirement is. So a 10% reserve means a multiplier of 1/.01 = 10. So your original deposit of $100 turns into a total of $1000. (So I shouldn't have said that your $100 turns into an additional $1000 lent out--I should have said the total money supply is $1000.)

Remember also that, even though $90 of your $100 was lent out, you can still walk into the bank and withdraw the $100 any time; you don't have to wait until whoever borrowed the $90 pays it back. The same is true of all the other deposits spawned by the $90 that is borrowed, and the $81 borrowed against that, and so on... So, again, the final effect of your depositing $100 is that the total money supply is $1000.

> you can still walk into the bank and withdraw the $100 any time

This is true, but if everyone did this at once it would constitute a run on the bank and it would fall under its reserve ratio. Not to mention the amount of money in the banking system is far far more than physical currency in print.

This is part of why some types of accounts (trading accounts etc.) require a few days to clear transactions. The expansion of the money supply is throughout the banking system and not just cash and deposits.

> This is true, but if everyone did this at once it would constitute a run on the bank and it would fall under its reserve ratio.

Yes, it would. So what? That isn't what stops bank runs from happening. What stops them from happening (now) is that people believe that their deposits are "guaranteed" by the government, so there's no need to go rushing to the bank and withdraw notes every time the economy takes a downturn. Before that guarantee was in place, there were indeed bank runs, and for the very reason I gave.

> the amount of money in the banking system is far far more than physical currency in print.

Yes, that's definitely true. And it's also true that most transactions, even for individuals, are not done in physical notes any more; they're done electronically (with debit cards or credit cards or wire transfers or whatever). So someone doesn't have to walk into the bank and withdraw their $100 in physical notes; they can do it any place, any time.

> And it's also true that most transactions, even for individuals, are not done in physical notes any more; they're done electronically (with debit cards or credit cards or wire transfers or whatever). So someone doesn't have to walk into the bank and withdraw their $100 in physical notes; they can do it any place, any time.

The difference between a credit card and a debit card is extremely relevant here. You can't run a bank with a credit card.

> You can't run a bank with a credit card.

Not when you make a credit card purchase, no. But you can when you electronically transfer funds from your bank account to pay the credit card bill.

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