created $20 million by writing the cheque) they receive in payment. The commercial bank in turn would deposit the cheque in its reserve account at its Reserve Bank. Having the $20,000,000 additional reserves, the commercial bank, by making loans (or buying securities), could increase its deposits to five times as much, or $100,000,000 the $20 million being the 20% reserves required against the $100 million of new deposits."
Analysing this story we find there are five steps in the process of creating bank deposits:
- Reserve authorities buy corporation securities or Government Bonds, giving to the corporation a cheque against no funds in payment. 2. The corporation deposits the cheque in its home bank, creating new bank deposits. 3. The bank re-deposits it in its Reserve Bank, creating new bank reserves which are credited to its reserve account on the Reserve Bank's books. 4. The commercial bank enters on its books as bank credit a sum five times its reserves on Reserve books. 5. The bank creates the $100 million new bank deposits by making loans to its customers or by buying investment obligations, in above example.
Summarizing, we reveal these astounding figures:
Corporation securities offering 6% $ 20 million Reserve cheque in payment. 20 million New bank deposits to corporation. 20 million New bank reserves, credit of bank. 20 million New bank credits on its books. 100 million New bank deposits to cr. of cust. 100 million New active monetary values. $140 million In the process the banks created $120 million bank deposits, came into ownership of the $20 million corporation stock and $100 million in personal notes, mortgages, bonds etc. They will re-sell the corporation stock and add the $20 million bank deposits they receive for them to their profit account, for the stock did