Re: Hummel Inquiry

["James R. Olson, jr." <jhavok@xxxxxxxx>]

At 11:29 AM 10/11/97 -0700, John B. O'Donnell wrote:

>I went a few rounds with Warren on this issue on one of the
>newsgroups a while back without his convincing me of his
>position. This is how things look to a banking practitioner, but
>I still believe that it is a legal requirement that a bank have
>funds to lend before it actually makes a loan. I also have no
>doubt that Warren is correct that any bank worth its salt can and
>will find funds to fulfill any loan promises it makes.

Reserve banking has been around since the Middle Ages.  It started when the
banks noticed that people were trading letters of credit rather than the
coins they represented, and realized that they could write letters of
credit that weren't backed by actual coins on deposit.  It was a dicey
proposition, though, and they needed to keep a certain amount on deposit to
cover the letters that were redeemed, since being unable to redeem a letter
of credit would lead to people considering all their letters of credit
worthless, which, of course, would mean that they were worthless.  This
amount kept on deposit was the "reserve" in reserve banking.

Currently, the Fed sets the reserve requirements, somewhere in the vicinity
of 15% or so, I think, so a bank can lend out about 7 times what it has
funds to cover, just by writing checks.  One of the tools of adjusting the
money supply is changing the reserve requirement.