Chain Repercussions on Other Banks

After the $900 created by Bank I leaves the bank, it will soon be deposited in another bank, and at that point it starts up a chain of expansion whereby still more’ bank money is created.

To see what happens to the $900, let’s call all the banks receive the $900 on makes (or ,Bank 2). Their combined balance sheets now appear as shown in Table 25-5. To these banks. the dollars deposited function just like our original $lOOO deposit. These banks do not care that they are second in a chain of deposits. Their only concern is that they are holding too much non-earning cash, or ex- , cess reserves. Only one-tenth of $900. or $90. is legally needed against the $900 deposit. They will use the other nine-tenths to acquire $810 worth of loans and investments. Their balance sheets will soon reach the equilibrium in Table 2s:.5(d)

At this point, the original $1000 taken out of hand-to-hand circulation has .produced a total of S2710 (=Si900 + 810) of money. The total of Mhas increased. and the proce~ continues. The $810 spent by the second-generation banks in acquiring loans and investments will go to a new set of banks called third-generation banks. You can create the balance sheets (initial and final) for thirdgmeration  banks. Eventually. the third-generation banks will lend out their excess reserves and will thereby create S729 of new money. A fourth generation of banks will clearly end up with nine-tenths of. $810 in deposits. or S729, and so on.

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