Money Supply Control: Base or Interest Rates? (1995)

Commercial bankers have traditionally seen themselves as playing a passive role in the money supply process. Bankers argued that, in general, they only lent out money that had first been deposited with them. There were two major flaws in this argument. First, the loan made on the basis of cash initially deposited generally led to the funds being redeposited in another bank. Creation of deposits was restrained by the banks’ need to keep reserves in the form of specie and/or Central Bank notes and deposits, in order to maintain the convertibility of their own liabilities into cash. Thus assuming a constant desired reserve/deposit ratio (D/R) , the initial injection of one unit of reserves into the banking system would, if there were no subsequent drains of such cash reserves from the system, lead to an ultimate multiple increase in deposits of D/R, in reserves of 1, and in other bank assets (e.g. loans) of D/R — 1. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.