Biblical Law and Government

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Figure 2 --- The Relationship of Demand Deposits to Bank Reserves Is Erratic in the Short Run . . .

uneven timing of credit demands. Although commercial bank loan policies normally take account of the gener al availability of funds, the size and timing of loans and investments made under those policies depend largely on customers' credit needs. In the real world a bank's lending is not normally constrained by the amount of excess reserves it has at any given moment. Rather, loans are made, or not made, depending on the bank's expectations about its ability to obtain the funds necessary to pay is cus tomers' checks and maintain required reserves in a timely fashion, in fact, because Federal Reserve regu lations specify that required reserves for a given week are based on deposit levels two weeks earlier, deposit creation actually precedes the provision of supporting reserves. The banker does not know today precisely what his reserve position will be at the time the pro ceeds of today's loans are paid out. Nor does he know when new reserves are being supplied to the banking system. Reserves are distributed among thousands of banks and the individual banker cannot distinguish between inflows originating from additions to reserves through Federal Reserve action and shifts of funds from other banks that occur in the normal course of business. To equate short-run reserve needs with available funds, therefore, many banks turn to the money mar ket—borrowing funds to cover deficits or lending tem porary surpluses. When the demand for reserves is strong relative to the supply/ money market funds to cover deficits tend to become more expensive and harder to obtain, which, in turn, may induce banks to adopt more restrictive loan policies and thus slow the rate of deposit growth. Federal Reserve open market operations exert control over the creation of deposits mainly through their impact on the availability and cost of funds in the money market. When the total amount of reserves supplied to the banking system through open market operations falls short of the amount required, some banks are forced to borrow at the Federal Reserve dis count window. Because such borrowing is restricted to short periods, the need to repay it tends to induce restraint on further deposit expansion by the borrowing bank. Conversely, when there are excess reserves in the banking system/individual banks find it easy and relatively inexpensive to acquire reserves, and expan sion in loans/investments, and deposits is encouraged.

. . . But More Stable in the Long Run

* Based on daily average for week or year

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Ten Commandments Bible Law Course Sovereignty Education and Defense Ministry (SEDM), http://sedm.org