File:Fractional-reserve banking with varying reserve requirements.gif

English: The expansion of $100 through fractional-reserve banking with varying reserve requirements. Created with openoffice.org Calc. Data obtained by using information from the Federal Reserve Bank of New York which explains how the process of fractional-reserve banking creates new money. See the description of the process on this page: http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html

It says:

Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+...=$500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity.