Can a bank "create" money and how much?

When someone deposits money in a bank, the bank takes on a liability; it owes money to the depositor. It also takes on an asset, the cash deposited.

At the present time it, the bank, only needs to keep 10% of that asset in cash so it makes a loan and transfers the cash asset to a loan asset. As the loan is repaid the balance sheet will show a periodic transfer from the loan asset back to the cash asset. The bank should also show an increase in cash and equity from the interest.

The bank can keep cycling cash back into loans but the bank's holdings will never exceed its cash assets, loan assets, and reserve assets. The amount it loans can increase as its equity increases but the total assets must equal its liabilities, what it owes depositors, and its equity, what it earned in interest.

So is the bank creating money? Yes, but there is a limit on how much it can create. (We are not talking the Fed here. As to the Fed, it is essentially a branch of the Treasury for all the talk of it being independent.)

There is a problem with the money that banks create. When economic times are bad, just when an influx of money is needed, banks become reluctant to loan money so the supply dries up. The sovereign has no restraint on creating money and can (and should) put money into the economy when there is a slow down. The time to restrict government money is when unemployment comes down, demand and prices go up, and the supply is struggling to catch up.

MMT thought

Electronic copy available at: http://ssrn.com/abstract=1905625

Understanding The Modern Monetary System
Cullen O. Roche
August 5, 2011

 "The government is an entity created by the people and for the people. It exists to further the prosperity of the private sector - NOT to benefit at its expense. If this entity is allowed to exist for its own benefit or becomes corrupted by a concentration of power or abuse of its currency issuing powers it will become susceptible to dissolution via the populace's rejection of that government."

Virtually Speaking site for Deficitowl

We really have to arrange a way for you to visit "in world".

We hear you and Jay through a connection to Blog Talk Radio. Although we can use an inworld voice system we rarely do, preferring to type into chat. This allows use to "talk" and ask questions without actually interrupting your discussion.

As to the venue: Here is view from the rear of the site. As you can see it reproduces a Roman auditorium that has been up dated.

A closer view of the platform where Jay (avatar) and guest(s) (avatar(s)) are normally seated.

We know it's past its unsell-by-date but we did have our own version of the platinum coin for you.

:=))

The obverse is, of course, your image and the reverse has an owl. :=))

The view from the dais, as seen from the position your avatar might be.

 And yes, that is me (avatar) as I was, oh, 30 years ago? :=))

Probably can't see it but I am wearing our group's Deficit Owl pin.