| Subject: | Re: [socialcredit] Re: Reply to Jessop | | Date: | Monday, May 2, 2005 08:09:04 (-0700) | | From: | Joe Thomson <thomsonhiyu @....ca>
|
| In reply to: | Message 1180 (written by Jessop Sutton) |
(Jessop wrote, in reply to Bill:-) ... are you not overlooking that it is
not the
> legal reserve that is the basis of credit extension by the banks but the
> EXCESS RESERVES as in this paragraph from the extract?
> (ii) Suppose further that the LEGAL RESERVE RATIO that banks have to
maintain
> with the central bank against their demand deposits is equal to 20
percent.
> The additional R1000 in D's [demand deposits] created in favour of Mr X
> therefore requires a cash reserve of R200 which has to lie interest free
in
> the central bank. This leaves the Bank A with R800 in cash reserves which
can
> go out on loan. These reserves may be regarded as EXCESS RESERVES, i.e.,
> reserves in addition to those it has to or wants to maintain.
---------------------------------------------------------
(Joe replies:-) Suppose there were a reserve ratio of 20% and a customer's
deposit were made of $ 1,000. By what you've written above, Jessop, I
gather the bank would retain $200 of that as a 'reserve', and have the
other $800 available for lending out. That seems to be the usual simple
conception most people have of how 'fractional reserve' banking works.
But what if the banker viewed the $ 1,000 AS HIS RESERVE? And instead of
asking what 20% of $ 1,000 is, we asked what $1,000 is 20% OF? How much
would that be? $ 5,000, right?
The example is simplified, I know, and there are other factors, but consider
his lending the $ 800 at 5% interest. He takes in $ 40 a year gross. And
as well as being a very cautious and conservative banker, with his
exceptional 20% reserve, he's also a very generous one, (might as well make
this as fantastic as possible!)
He splits his $ 40 profit with you, his depositor, 50/50. You get $ 20, or
a 2% return on your $ 1,000 savings. And, considering the times, you think
that's wondeful.
But what if he instead uses the whole of your
$ 1,000 as his RESERVE? On that same 20% reserve ratio can he not now lend
out $ 5,000? And at that same 5% interest, how much is his gross going to
be now? $ 250, if I'm doing my sums correctly, is it not? Think he'll
still give you half?
Joe
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