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MONEY
CREATION
PROCESS
In a fractional reserve
system

SPEAKER:
TRẦN THỊ HỒNG DUYÊN
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CONTENTS
01 FEDERAL RESERVE

THE SIMPLE CASE OF

02 100-PERCENT-RESERVE BANKING

03 MONEY CREATION WITH

FRACTIONAL RESERVE BANKING
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01
FEDERAL RESERVE
THE FED
In the US, the Federal Reserve (Fed)
is responsible for regulating the
system. The Fed is the central bank

Central bank is an institution

designed to oversee the banking
system and regulate the quantity of
money in the economy
 2 RELATED JOBS
OF THE FED

Regulating and ensuring the health

Controlling the money supply
of the banking system

THE MONEY SUPPLY

the quantity of money that is made
available in the economy
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02
THE SIMPLE CASE OF 100-
PERCENT-RESERVE
BANKING

- No banks
- The total quantity of currency (the only
form of money) is $100
Þ The supply of money = $100
- First National Bank is a depository institution that
gives depositors a safe place to keep their money.
- All deposits are reserves
Þ The system is called 100-percent-reserve
banking.
Reserves: Deposits that banks have received but
have not loaned out
 T-ACCOUNT FOR FIRST
NATIONAL BANK
Assets Liabilities

Reserves $100 Deposits $100

The assets and liabilities balance

Þ T-account is called a balance sheet.

Reduces currency
money supply
Each deposit in the bank

=
unchanged
Raises demand deposits

If banks hold all deposits in reserve, banks do

not influence the supply of money
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03
MONEY CREATION WITH
FRACTIONAL-RESERVE
BANKING
Fractional reserve banking Reserve requirement

A banking system in which The minimum amount of

banks hold only a fraction of reserves that banks must hold.
deposits at reserves.

Reserve ratio Excess reserves

Reserves above legal minimum
The fraction of deposits that
banks hold as reserves
FRACTIONAL
RESERVE BANKING
 FIRST Unchanged
NATIONAL BANK Not alter the bank’s
Reserve ratio Assets Liabilities obligation to its
= 10% depositors
Reserves $100 Deposits $100
(checking
account)

Reserves $10
Loans $90

$100 $90

Money Currency Demand deposits

+ = $190
= (borrowers) + (depositors) = $90 $100
supply
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When banks hold only a fraction
of deposits in reserve, banks create
money

However
Borrowers are taking on debts
Þ Loans do not make them richer
Þ Banks create a corresponding liabilities for
those who borrowed the created money

The economy is more of the medium of

exchange, no wealthier than before
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