Bài giảng Macro - Chapter 13 How Banks Create Money

How Banks Create MoneyChapter 13SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGEIn this chapter you will learnHow a single chartered bank can create (or destroy) money through loans to the publicAbout the multiple-deposit expansion of the entire chartered banking systemWhat the monetary multiplier is and how to calculate itChapter 13 TopicsThe Balance Sheet of a Chartered BankPrologue: The GoldsmithsA Single Chartered BankThe Banking System: Multiple-Deposit ExpansionThe Balance Sheet of a Chartered BankASSETS = LIABILITIES + NET WORTHASSETSLIABILITIES ANDNET WORTHBALANCE SHEETS WILL BE USED TO DESCRIBE THE CREATION OFMONEY© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 74Chapter 13 TopicsThe Balance Sheet of a Chartered BankPrologue: The GoldsmithsA Single Chartered BankThe Banking System: Multiple-Deposit ExpansionPrologue: The GoldsmithsGoldsmiths accepted gold deposits and issued paper receiptsPaper receipts were used as a medium of exchange100% reserve systemeventually led to fractional reserve systemPrologue: The GoldsmithsFractional Reserve SystemMoney creation & reservesBank panics & regulationChapter 13 TopicsThe Balance Sheet of a Chartered BankPrologue: The GoldsmithsA Single Chartered BankThe Banking System: Multiple-Deposit ExpansionFormation of a Chartered BankASSETSLIABILITIES ANDNET WORTHTRANSACTION 1Birth of a bank$250,000 CashforCapital StockVancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 139ASSETSLIABILITIES ANDNET WORTHCash $250,000Capital Stock $250,000Formation of a Chartered Bank Vancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1310ASSETSLIABILITIES ANDNET WORTHCash $250,000Capital Stock $250,000TRANSACTION 2Acquiring Property andEquipment$240,000 CashAcquiring Property and EquipmentVancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1311Acquiring Property and EquipmentASSETSLIABILITIES ANDNET WORTHCash $ 10,000Property 240,000Capital Stock $250,000Vancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1312ASSETSLIABILITIES ANDNET WORTHCash $ 10,000Property 240,000Capital Stock $250,000TRANSACTION 3AcceptingDeposits$100,000 CashAccepting DepositsVancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1313Accepting DepositsASSETSLIABILITIES ANDNET WORTHCash $110,000Property 240,000Demand Deposits $100,000Capital Stock 250,000Vancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1314Accepting DepositsASSETSLIABILITIES ANDNET WORTHCash $110,000Property 240,000Demand Deposits $100,000Capital Stock 250,000Note: demand depositsare LIABILITIESto the bankVancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1315ASSETSLIABILITIES ANDNET WORTHReserves $ 110,000Property 240,000Demand Deposits $100,000Capital Stock 250,000ReservesVancouver BankNote:cash is part of the bank’s reserves© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1316ASSETSLIABILITIES ANDNET WORTHReserves $110,000Property 240,000Demand Deposits $100,000Capital Stock 250,000Bank deposits aresubject to a desiredreserve ratioReservesVancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1317ASSETSLIABILITIES ANDNET WORTHDemand Deposits $100,000Capital Stock 250,000Reserves $110,000Property 240,000 Excess ReservesTwo Important Points...1. Excess Reserves (E) = Actual Reserves - Desired Reserves Assume 10% Desired Reserve Requirement FIND THE EXCESS RESERVESdesired reserves= 10% X $100,000=$10,000actual reservesVancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1318ASSETSLIABILITIES ANDNET WORTHDemand Deposits $100,000Capital Stock 250,000Reserves $110,000Property 240,000 Excess ReservesTwo Important Points...1. Excess Reserves (E) = Actual Reserves - Desired Reserves Assume 10% Desired Reserve Requirement E = $110,000 - 10,000 = $100,000Vancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1319ASSETSLIABILITIES ANDNET WORTHDemand Deposits $100,000Capital Stock 250,000Reserves $110,000Property 240,000 Excess ReservesTwo Important Points...1. Excess Reserves (E) = Actual Reserves - Desired Reserves Assume 10% Desired Reserve Requirement E = $110,000 - 10,000 = $100,0002. Bank of Canada can influence the lending ability of banks through reservesVancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1320Clearing a ChequeASSETSLIABILITIES ANDNET WORTHReserves $110,000Property 240,000Demand Deposits $100,000Capital Stock 250,000TRANSACTION 4A cheque is drawn against the Vancouver bank = $50,000Vancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1321ASSETSLIABILITIES ANDNET WORTHReserves $ 60,000Property 240,000Demand Deposits $50,000Capital Stock 250,000After Cheque ClearingTRANSACTION 4This bank loses reserves and deposits to the Bank of ManitobaVancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1322Money Creation: Single BankThe maximum amount of new money which can be created by a single bank is equal to its excess reservesThe bank creates money when it creates new loansMoney is destroyed when loans are repaidASSETSLIABILITIES ANDNET WORTHReserves $ 60,000Property 240,000Demand Deposits $ 50,000Capital Stock 250,000Creating a New LoanBank hasexcess reservesof HOW MUCH?Use a 20% reserveratioVancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1324ASSETSLIABILITIES ANDNET WORTHTRANSACTION 5 Reserves $ 60,000Property 240,000Demand Deposits $ 50,000Capital Stock 250,000Creating a New LoanBank makes a loan to GrisleyCompany equal tothe excess reserves$50,000Vancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1325New Loan Before Cheque ClearingASSETSLIABILITIES ANDNET WORTHReserves $ 60,000Loans 50,000Property 240,000Demand Deposits $100,000Capital Stock 250,000Vancouver BankA new loan & a new deposit of $50,000 are created© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1326New Loan Before Cheque ClearingASSETSLIABILITIES ANDNET WORTHReserves $ 60,000Loans 50,000Property 240,000Demand Deposits $100,000Capital Stock 250,000Vancouver BankNew money of $50,000 has been created created© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1327New Loan Before Cheque ClearingASSETSLIABILITIES ANDNET WORTHReserves $ 60,000Loans 50,000Property 240,000Demand Deposits $100,000Capital Stock 250,000Vancouver BankBut did Grisleyborrow the moneyto leave it in the bank?© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1328ASSETSLIABILITIES ANDNET WORTHReserves $ 60,000Loans 50,000Property 240,000Demand Deposits $100,000Capital Stock 250,000NO!New Loan Before Cheque ClearingVancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1329ASSETSLIABILITIES ANDNET WORTHReserves $ 60,000Loans 50,000Property 240,000Demand Deposits $100,000Capital Stock 250,000New Loan Before Cheque ClearingVancouver BankGrisley Co. writes a cheque worth $50,000payable to QuickbuckCo. which banks at theManitoba Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1330ASSETSLIABILITIES ANDNET WORTHReserves $ 10,000Loans 50,000Property 240,000Demand Deposits $50,000Capital Stock 250,000New Loan After Cheque ClearingVancouver BankNote that after clearing,the Vancouver Bank hasno more excess reserves!© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1331ASSETSLIABILITIES ANDNET WORTHReserves $ 10,000Loans 50,000Property 240,000Demand Deposits $50,000Capital Stock 250,000New Loan After Cheque ClearingVancouver BankA bank MUST haveexcess reserves to createloans© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1332Months later...© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1333ASSETSLIABILITIES ANDNET WORTHReserves $ 10,000Loans 50,000Property 240,000Demand Deposits $ 50,000Capital Stock 250,000Repaying a LoanTRANSACTION 6Repaying a loan worth$50,000Vancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1334ASSETSLIABILITIES ANDNET WORTHReserves $ 10,000Loans 0Property 240,000Demand Deposits $ 100,000Capital Stock 250,000Repaying a LoanVancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1335Note that the amount ofmoney - demand deposits -has declined by $50,000ASSETSLIABILITIES ANDNET WORTHTRANSACTION 7 Reserves $ 60,000Property 240,000Demand Deposits $ 50,000Capital Stock 250,000Creating a New LoanBank buys securities from the public for an amount equal tothe excess reservesVancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1336ASSETSLIABILITIES ANDNET WORTHReserves $ 60,000Securities 50,000Property 240,000Demand Deposits $100,000Capital Stock 250,000Creating a New LoanVancouver Bank© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1337Once again, the money supply has increased by $50,000Government SecuritiesBond purchases from the public by the chartered banks increase the money supplyBond sales to the public decrease the money supplyConflicting GoalsProfitLiquidityOvernight loans rateChapter 13 TopicsThe Balance Sheet of a Chartered BankPrologue: The GoldsmithsA Single Chartered BankThe Banking System: Multiple-Deposit ExpansionThe Banking SystemMultiple Deposit ExpansionA single bank can lend one dollar for each dollar of excess reservesThe banking system can lend (create money) by a multiple of its excess reservesThree AssumptionsReserve ratio is 20%Initially, no banks have excess reservesAny bank with excess reserves will lend to ONE personwho will write a cheque to someone elsewho will then deposit it in another bankBankAcquired reservesand depositsDesiredreservesExcessreservesAmount bankcan lend. Newmoney createdA$100.00 © 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1343Junkyard owner finds $100 bill in a junked car, & deposits itMultiple Deposit Expansion ProcessTable 13-1BankAcquired reservesand depositsDesiredreservesExcessreservesAmount bankcan lend. Newmoney createdA$100.00 © 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1344Note that at this stageNO new money hasbeen createdTable 13-1Multiple Deposit Expansion ProcessBankAcquired reservesand depositsDesiredreservesExcessreservesAmount bankcan lend. Newmoney createdA$100.00 $ 20.00 © 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1345Table 13-1Multiple Deposit Expansion ProcessBankAcquired reservesand depositsDesiredreservesExcessreservesAmount bankcan lend. Newmoney createdA$100.00 $ 20.00 $80.00 © 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1346Table 13-1Multiple Deposit Expansion ProcessBankAcquired reservesand depositsDesiredreservesExcessreservesAmount bankcan lend. Newmoney createdA$100.00 $ 20.00 $80.00 © 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1347Money is createdonce the loan is made$80.00 Table 13-1Multiple Deposit Expansion ProcessBankAcquired reservesand depositsDesiredreservesExcessreservesAmount bankcan lend. Newmoney createdA$100.00 $ 20.00 $80.00 © 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1348$80.00 Loan recipient nowspends the money.He/she buys something;seller deposits proceeds in his/her bank.Table 13-1Multiple Deposit Expansion ProcessBankAcquired reservesand depositsDesiredreservesExcessreservesAmount bankcan lend. Newmoney createdAB$100.00 80.00 $ 20.00 $80.00 $80.00 © 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1349New depositmeans excess reserves in seller’s bank; process repeatsTable 13-1Multiple Deposit Expansion ProcessBankAcquired reservesand depositsDesiredreservesExcessreservesAmount bankcan lend. Newmoney createdAB$100.00 80.00 $ 20.00 16.00 $80.00 64.00 $80.00 64.00 © 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1350Table 13-1Multiple Deposit Expansion ProcessBankAcquired reservesand depositsDesiredreservesExcessreservesAmount bankcan lend. Newmoney createdABC$100.00 80.00 64.00 $ 20.00 16.00 12.80 $80.00 64.00 51.20 $80.00 64.00 51.20 © 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1351Table 13-1Multiple Deposit Expansion ProcessBankAcquired reservesand depositsDesiredreservesExcessreservesAmount bankcan lend. Newmoney createdABCDEFGHIJKLMNOther banks$100.00 80.00 64.00 51.20 40.96 32.77 26.22 20.98 16.78 13.42 10.74 8.59 6.87 5.50 21.97$ 20.00 16.00 12.80 10.24 8.19 6.55 5.24 4.20 3.36 2.68 2.15 1.72 1.37 1.10 4.40$80.00 64.00 51.20 40.96 32.77 26.22 20.98 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.57$80.00 64.00 51.20 40.96 32.77 26.22 20.98 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.57Total amount of money created by the bank system = © 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1352$400.00Table 13-1Multiple Deposit Expansion ProcessBankAcquired reservesand depositsDesiredreservesExcessreservesAmount bankcan lend. Newmoney createdABCDEFGHIJKLMNOther banks$100.00 80.00 64.00 51.20 40.96 32.77 26.22 20.98 16.78 13.42 10.74 8.59 6.87 5.50 21.97$ 20.00 16.00 12.80 10.24 8.19 6.55 5.24 4.20 3.36 2.68 2.15 1.72 1.37 1.10 4.40$80.00 64.00 51.20 40.96 32.77 26.22 20.98 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.57$80.00 64.00 51.20 40.96 32.77 26.22 20.98 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.57Total amount of money created by the bank system = © 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1353$400.00Monetary destruction works the same way in reverseTable 13-1Multiple Deposit Expansion ProcessMonetarymultiplierR1=.201=5The Monetary Multiplier=The Monetary MultiplierMaximumdemand-depositexpansion=ExcessreservesxMonetarymultiplierMonetarymultiplierR1==.201=5The Monetary MultiplierMaximumdemand-depositexpansion=ExcessreservesxMonetarymultiplierMonetarymultiplierR1==.201=5=80x5=400$100New reserves$ 20Desiredreserves$80Excessreserves$100initialdeposit$400Bank system lendingMoney createdOutcome of Money Expansion - Fig. 13-1© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1357Some ModificationsOther LeakagesCurrency DrainsExcess ReservesNeed for Monetary Controlan unregulated banking system can destabilize the economythere is a role for a central bankChapter 13 TopicsThe Balance Sheet of a Chartered BankPrologue: The GoldsmithsA Single Chartered BankThe Banking System: Multiple-Deposit ExpansionThe Bank of CanadaandMonetary PolicyChapter 14Next...