The consequences of keeping reserves
Banks lend out the money they receive as deposits, as part of the money creation cycle of lending, spending, earning, and saving; however, they must reserve some of that money for withdrawals of true cash (bank notes and coins.)
The need to keep reserves has important consequences for the money creation cycle of lending, spending, earning, and saving. Without the need for reserves, the original money could go around the cycle endlessly, creating an unlimited supply of money, and an unlimited amount of debt as it does so; however, every time the money is saved in the cycle cash reserve must be removed and put aside before the money is lent out again. Taking out reserves looks like this:
Every time the money goes around the cycle, there is a little less of it; eventually there is so little left going around that it is insignificant, and the original money's capacity to be expanded this way has been used up. Because of the need to put reserves aside, the money that started the money creation cycle can only be used to create a limited and specific amount of money before its capacity to be expanded this way has been used up.
This means that while the banks use the money creation cycle to create most of our money supply out of debt, a continuous supply of money that has not been created by the cycle is needed to start the cycle. To allow the supply of money to keep on expanding so that the economy can keep on growing, new money that wasn't created by the banks using the money creation cycle must be continually added to the economy so that it can be expanded by the money creation cycle to allow growth.
The money that wasn't created by the money creation cycle and which is expanded by the money creation cycle is created by governments, usually working with their central bank. This money is also created with an equal value of debt, but using a different process than the money creation cycle. The money creation cycle used by banks to create money is dependant on this government created money to start it off. This dependence gives governments some control over how much money is created by the banks, and therefore some control over the size and growth of economies.
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