Tuesday, March 10, 2009

The demise of fractional reserve banking in the United States

The Demise of Fractional Reserve Banking, via Mark Thoma

We don't have fractional reserve banking anymore.

In statistics-speak, since last November, the monetary base has exceeded M1, which means, more or less, that bank reserves (plus surplus vault cash) exceed liquid deposits

What about the Australian experience? There has been a significant decline in the money multiplier in Australia since last October. Utilising RBA data on the money base and M1, the money mutiplier (M1/money base) from January 2000 - September 2008 averaged 4.5, with a minimum of 4 in December 2002. The multiplier fell from 4.7 to 3.8 from September 2008 to October, then to 3.5 in November and 3.2 in December.

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