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Money and Banking

In: Money, Credit, and Crises

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  • Nektarios Michail

    (Central Bank of Cyprus)

Abstract

At the time countries were tied to the gold standard, money supply in the economy was, as already discussed, effectively controlled by the amount of gold in the economy. This chapter examines how modern banks function and how these institutions are essential for the money creation process. Bank balance sheet illustrations are presented in order to provide the reader with a clear view of the changes in the bank’s books after a new loan is created. Drawing from the above allows us to depart from the classical notion of a money multiplier and create an enhanced version, based on capital ratios. The chapter moves on to examine how changes in bank deposits, unrelated to changes in lending can signal potential incentives for excess lending or potential liquidity shortages in the future. The role of the central bank is also underlined in this chapter as, in the realistic case of multiple commercial banks, funds are limited to the provision of central bank liquidity, and to some extent, to changes in government debt.

Suggested Citation

  • Nektarios Michail, 2021. "Money and Banking," Springer Books, in: Money, Credit, and Crises, chapter 0, pages 77-90, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-64384-3_4
    DOI: 10.1007/978-3-030-64384-3_4
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