A Workbook on Bank Reserves and Deposit Expansion
Federal Reserve Bank of Chicago
The purpose of this booklet is to describe the basic process of money creation in a “fractional reserve” banking system. The approach taken illustrates the changes in bank balance sheets that occur when deposits in banks change as a result of monetary action by the Federal Reserve System – the central bank of the United States. The relationships shown are based on simplified assumptions. For the sake of simplicity, the relationships are shown as if they were mechanical, but they are not, as is described later in the booklet. Thus, they should not be interpreted to imply a close and predictable relationship between a specific central bank transaction and the quantity of money.
The introductory pages contain a brief general description of the characteristics of money and how the US money system works. The illustrations in the following two sections describe two processes: first, how bank deposits expand or contract in response to changes in the amount of reserves supplied by the central bank; and second, how those reserves are affected by both Federal Reserve actions and other factors. A final section deals with some of the elements that modify, at least in the short run, the simple mechanical relationship between bank reserves and deposit money.
Copies of this workbook are available from:
Public Information Center
Federal Reserve Bank of Chicago
P.O. Box 834
Chicago. IL 60690-0834
[312] 322-5111
This publication originally was written by Dorothy M. Nichols in May 1961. The June 1992 revision was prepared by Anne Marie L. Gonczy
REVISED
May I968 September 1971 June 1975 October 1982 June 1992
February 1994 40M Printed in U.S.A.
This publication is not property of Franklin County Libertarians and is presented in good faith as an educational resource.