A Primer on Money, Banking, and Gold (Peter L. Bernstein's Finance Classics) by Bernstein Peter L
Author:Bernstein, Peter L. [Bernstein, Peter L.]
Language: eng
Format: mobi
Publisher: John Wiley and Sons
Published: 2008-09-24T16:00:00+00:00
However, the description of this process raises an extremely important point that usually receives much too little attention in discussions of how far the commercial banking system can go in creating money. What we have analyzed here is a purely theoretical description of what goes on; it tells us nothing about what may result in reality from any given level of excess reserves. Even if the banks attempt to lend out and invest every penny of excess reserves that they hold, and even if the Federal Reserve takes no steps to discourage or restrain them, we still have no idea of what will happen to the supply of money, for that ultimately depends upon the willingness of all the business firms and individuals and other depositors in the banks to increase their holdings of demand deposits and currency. If the public decides to use the additional liquidity to repay loans to the banks or to repurchase securities from the banks or—as we shall see in a later chapter—to hold more balances in time deposits rather than in demand deposits, the money supply will either fail to increase or will in any case fall short of the theoretical limit set by the reserve requirement ratio and the level of excess reserves. We must never forget that the willingness of the public to hold money rather than repaying debts to the banks or holding other types of liquid assets can set a practical limit to the supply of money that may be below the theoretical one.23
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