On Teaching Money and Banking

Abstract

I have long been dissatiffied with the great emphasis standard texts give to two trivial ideas: that a single bank in a multibank system cannot (or should not) loan more than its excess reserves; and that the banking system can do something that no individual bank can do. My contention is that these two ideas are superfluous and, like excess cash reserves, can be profitably eliminated. A perusal of ten introductory textbooks' reveals variations on a common theme. In one form or another, briefly or at length, they explain how a banking system creates a multiple expansion of deposits even though each bank lends only its excess reserves. The question I raise is whether this emphasis on the single bank versus the banking system makes the entire topic more complicated and confusing to students than it need be. Consider first the emphasis on the individual bank restricting its new loans to the amount of its excess reserves. The texts are cluttered with statements of the following type: (italics in the original) As a general principle, then, we can state that when a single bank in a multibank system has excess reserves, its loans and deposits can be expanded by an amount equal to the excess reserve. (Leftwich, p. 412.)