loans create deposits- the last word

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Posted by warren mosler (65.113.90.18) on 14:16:18 10/31/04


monetary operations:

Case 1

Assumptions-

1. one bank, all funds remain as a deposit in that bank.

2. reserve requirements on deposits

3. the bank 'starts' with no reserves

When the bank makes a loan it credits the borrow's checking account. So now the bank has on its books a loan and a deposit. The bank is in balance.

The bank also has incurred as reserve requirement at the Fed. Since the loan/deposit has already been completed, the reserve requirement constitutes an 'overdraft' at the Fed. And overdraft IS a loan, so operationally reserves are 'automatically lent' to the bank.

The Fed 'prices the overdraft' by one way or another 'assigning' an interest rate, and thereby sets the fed funds rate.

see 'a gen frame for the analy of currency and comm' at this website for details and extensions


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