> Holding cash, after all, is just withholding wealth from being productive.
Unless you're literally storing notes under your bed, your bank is lending out your money to someone.
Unless you're literally storing notes under your bed, your bank is lending out your money to someone.
Banks don't lend deposits. It seems that it's one of those fallacies that never die. Maybe, because it's in the textbooks.
"[..]reserve requirement does not act as a binding constraint on banks’ ability to lend and consequently their ability to create money. The reality is that banks first extend loans and then look for the required reserves later."
From: http://www.investopedia.com/articles/investing/022416/why-ba...
Banks are required to have certain reserves. It's true that they can already lend money while they are still looking for the required money to refill their reserve. But they will have to fill up their reserve at some point, and for that they need money, otherwise they will have to stop lending.
So it is not a fallacy that banks are lending deposits and it's not so strange that this is in the textbooks.
-From deposits. -In the interbank market, where banks with excess reserves lean to bank that need reserves. -From the Central Bank.
The Central Bank always lend the necessary reserves. A different issue is if that would be a good business for the bank.
The point is that the quantity a bank can lend it's not limited by deposits as the normal narrative imply.
Consider two banks in the same country, so having to comply with the same reserve requirements. The reserve requirements are defined as a percentage of the amount on the banks's deposit account at the central bank. So the bank which can transfer an extra deposit to this acount is the one which is able to lend more money.