Capital Stock $100,000 Deposits 666,666 -------- $766,666 Further: Suppose that $100,000 of cash is deposited with the bank from the channels of business; how much more can it lend? Fifteen thousand dollars must be retained as reserve against the new liability; $85,000 is available as reserves against further lending. Based upon these further reserves loans may be granted to the extent of nearly $600,000 more. In fact, only with an expansion of $1,233,333 in loans and in derived deposits--a total deposit of $1,333,333--has its reserve fallen to the ratio of 15 per cent. of its liability. _Resources_ Cash (original) $100,000 Loans and Discounts 666,666 Cash (new) (85,000 (15,000 L & D (new) 566,666 ---------- $1,433,333 _Liabilities_ Capital Stock $100,000 Deposits 666,666 Deposits (new) (100,000 (566,666 ---------- $1,433,333 The situation summarizes as follows: On its asset side the bank has $200,000 of cash and $1,233,333 of securities (Bills and Notes). Its deposit liabilities amount to $1,333,333. Its cash is 2/13.3+ of its liability--15 per cent. ~The Function of Reserves.~--If this is what actual banking means, is banking safe? What would happen if all these deposits were immediately called for in cash? True, not all are likely to be called for, but some cash will be demanded. In fact, the borrowers, instead of accepting all of the proceeds of these notes in deposit credit, will in some measure require and receive cash. Precisely so; and so the bank must keep on hand a cash reserve to meet this possibility. For the most part, however, the customers of the bank make payments through checks upon the bank, and these credits are deposited in turn to the credit of other customers. No cash, but only bookkeeping, is required. And if some customers draw out cash, other customers will probably receive it and return it to the bank. A reserve of 15 per cent. is enough for the case. There, would, indeed, be small gain in banking if against every deposit an equal sum in cash must be held in store by the bank. ~Economy of Redemption Money.~--It is thus evident that the employment of $200,000 cash as a banking reserve has made possible the existence of a more than sixfold volume of circulating medium--currency. Against each $1,000 of deposit liability there need be only $150 of actual cash. The bank customer, however, thinks of his deposit claim as money, and it really serves him all the purposes of money. The right to have the money when desired is as good as the actual money, is more convenient, and is as readily and as serviceably transferred.