Michael Foster wrote:
> > The vast majority of the money supply is not currency, but bank > issued debt. The present multiplier allowed to commercial banks is > 10. That is, they can lend out ten dollars for every dollar deposited > in them. I believe that is incorrect. What you said, which I've also seen quoted on the Internet in various places, would make no sense -- the money lent out would be coming from noplace, and banks, unlike every other sort of company, would have the ability to lend out stuff they don't have to start with. They can't do that; only the federal government has the power to create money, and it's been delegated to the Federal Reserve Board. Banks are *not* magic, and cannot create money, no matter what that asinine Brasscheck video about "debt money" tells you. The real situation is actually a bit different: If the current reserve requirement is 10%, then they can lend out 9/10 of each dollar on deposit -- not ten times each dollar on deposit! The reserve requirement, which is may be what this alleged "multiplier" refers to, is a *restriction* on banks, *not* a special power granted to them. There is a true "multiplier" involved, which is a theoretical value obtained by assuming every borrower deposits the full value of the loan back into another bank, which then can lend out most of it to yet another borrower. With a reserve requirement of 10% this "multiplier effect" is about a factor of 9. What that means is that, if the Fed deposits $100 in a bank, the money which flows into the economy as a result is actually about $900. This is probably the multiplier you're thinking of, *but* it's not because banks are allowed to lend out more than they take in; rather it's because sum_0^infinity (a^n) = a / (1 - a)
