Fractional-reserve banking: Difference between revisions
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Fractional-reserve banking is the modern practice of lending multiples of deposits held by banks. For example, a deposit of ten pounds enables the bank to lend ninety pounds to a new borrower (i.e. £100, less £10 kept as reserve), thereby increasing the amount "money" in circulation. The reserve ratio varies from time to time as determined by the central bank and is one of the means of controlling the money supply.<ref>Economics, P. A. Samuelson and W. D. Nordhaus</ref> | Fractional-reserve banking is the modern practice of lending multiples of deposits held by banks. For example, a deposit of ten pounds enables the bank to lend ninety pounds to a new borrower (i.e. £100, less £10 kept as reserve), thereby increasing the amount "money" in circulation. The reserve ratio varies from time to time as determined by the central bank and is one of the means of controlling the money supply.<ref>Economics, P. A. Samuelson and W. D. Nordhaus</ref> | ||
Critics of fractional-reserve banking argue that banks have an unfair advantage over other businesses in being able to "transform a dollar of reserves into many dollars of money".<ref> Economics, P. A. Samuelson and W. D. Nordhaus pp.237</ref> | |||
Revision as of 16:54, 27 April 2007
Fractional-reserve banking is the modern practice of lending multiples of deposits held by banks. For example, a deposit of ten pounds enables the bank to lend ninety pounds to a new borrower (i.e. £100, less £10 kept as reserve), thereby increasing the amount "money" in circulation. The reserve ratio varies from time to time as determined by the central bank and is one of the means of controlling the money supply.[1]
Critics of fractional-reserve banking argue that banks have an unfair advantage over other businesses in being able to "transform a dollar of reserves into many dollars of money".[2]