The reserve/deposit ratio is usually about 10%, meaning the bank can only lend out 90% of its inactive money: 10% must be kept still doing nothing.įor illustration, assume the bank has one pound of inactive money, which it can lend. The bank can lend this inactive money to eager borrowers, subject to it retaining a legally prescribed percentage, called the “reserve/deposit ratio”. Meanwhile, during all these deposits and withdrawals, at any particular time, any bank has on deposit large amounts of inactive money, which the bank is at present not being ordered to pay out. For more details of this clever trick, see our inflation document. This can include money the government does not have! In other words, the government just prints it. The bank can also borrow money from the government (the Bank of England) at interest. A minor difference is that the bank tends to pay more interest to the government than it does to poor old jo. From the point of view of the bank, the situation is similar whether the government deposits the pound, or whether the pound arrives when jo six-pack puts his wages into the bank. The bank will then pay out other sums of money at the account holder’s request, sums of money which will, in their turn, end up in other bank accounts. The money that each service provider receives will, in due course, fetch up in another bank account. That money will end up at a provider of services, for example at a supplier of motor cars, or as the wages of a government employee. The government pays for real goods, usually through a government bank account. A ‘single’ note or coin is used over and over again. Here we will explain in more detail what those terms mean and how it works in practice, including the sums. Our inflation paper mentions something called “ the lender’s multiplier”, which is dependent on the “ reserve/deposit ratio”. Sum of a geometric sequence: or the arithmetic of fractional banking Sums will set you free is included in the series of documents about economics and Or the arithmetic of fractional banking by abelard Sums will set you free the sum of a geometric sequence: The sum of a geometric sequence: or the arithmetic of fractional banking | sums will set you free at
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