The Nature and Creation of Money

Key Takeaways

• Banks are financial intermediaries that accept deposits, make loans, and provide checking accounts for their customers.
• Money is created within the banking system when banks issue loans; it is destroyed when the loans are repaid.
• An increase (decrease) in reserves in the banking system can increase (decrease) the money supply. The maximum amount of the increase (decrease) is equal to the deposit multiplier times the change in reserves; the deposit multiplier equals the reciprocal of the required reserve ratio.
• Bank deposits are insured and banks are heavily regulated.
• Similar to the passage of the Glass-Steagall Act during the Great Depression, the Dodd-Frank Act was the comprehensive financial reform legislation that responded to the financial crisis in 2008 and the Great Recession.