It looks like you're using an Ad Blocker.
Please white-list or disable AboveTopSecret.com in your ad-blocking tool.
Thank you.
Some features of ATS will be disabled while you continue to use an ad-blocker.
Here is how fractional reserve banking works in the United States, using the current approximate 10% fractional reserve ratio requirement:
1) A depositor deposits $100 with a bank. (This depositor could be a citizen, or another bank, even a receiver of the FED's open market operations which is described later.)
Total Reserves: $100, Total Loans: $0, Total Money Supply: $100
2) The bank holds $10 for its reserves and loans out the other $90 to other banks or citizens. If it is a citizen, this money is temporarily held outside the banking system until he/she decides to deposit the money into a bank.
Total Reserves: $10, Total Loans: $90, Total Money Supply: $100
3) Next, the second bank takes the $90 in deposits, holds $9 for its reserves, and loans out the other $81.
Total Reserves: $19,
Total Loans: $171, Total Money Supply: $190
4) Step 3 repeats. The third bank takes the $81 as a deposit, holds $8.10 for its reserves, and then loans out $72.90.
Total Reserves: $27.10,
Total Loans: $243.90,
Total Money Supply: $271
5) Step 3 repeats again. The fourth bank takes the $72.90 as a deposit, holds $7.29 for its reserves, and then loans out $65.61.
Total Reserves: $34.39,
Total Loans: $309.51,
Total Money Supply: $343.90
6) And so on. The bulk of the money creation is done after 15 repeats, but what is eventually left after 40 or 50 repeats is pretty much:
Total Reserves: $100,
Total Loans: $900,
Total Money Supply: $1000
So you can see that within a very short period of time, banks transferring to other banks within the system can CREATE $900 from the initial $100 deposit.
Here's how it works, step-by-step, when the FED buys Treasuries, although it is the same process for whatever asset they wish to purchase.
1) The FED's Open Market Committee (FOMC) decides expand the nation's money supply and purchases, for example, $10 billion in Treasury bonds.
Monetary Supply Expansion: $0
2) The FED writes a check on itself for $10 billion. [Where did it get the money? The answer is FROM NOWHERE!]
Monetary Supply Expansion: $10 billion
3) This $10 billion FED check then goes to one of the select government bond dealers (such as Secretary Paulson's Goldman Sachs) in exchange for the $10 billion in Treasuries.
Monetary Supply Expansion: $10 billion
4) Then the bond dealer deposits its $10 billion FED check at a commercial bank.
Monetary Supply Expansion: $10 billion
5) Go to the fractional reserve loop above. We just learned how this deposit will very quickly be "pyramided" and lead to $10 billion in deposits and $90 billion in loans within the banking system.
Monetary Supply Expansion: $100 billion