Thursday, April 30, 2009

process of money creation

the creation of money seem much less mysterious after the process is examined step by step. It may then be realized that this process of money creation depends upon (1) a fractional legal reserve requirement, so that banks do not have to maintain 100 per cent reserves against their demand deposits,(2) a fractional legal reserve ratio against time deposits, (3) the provision of added reserves by the central bank,i.e., the federal Reserve System,(4) the demand for currency on the part of the public, which may be viewed as a ratio of demand deposits held by the public, (5) the demand for time deposits by the public, which again may be viewed as ratio of demand deposits, and (6) the demand for excess reserve by commercial banks.

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