The Interest Rate

[DD5]

@MMMark

The supply increases,

So it is inflationary according to your definition

@MMMark

but not necessarily the number of new dollars actually chasing the same number of goods

So now you’re talking about not being a rise in prices.

@MMMark

This I don’t understand.

Let’s suppose Mr. MOTS deposits $100 in Effar Bank, then Effar Bank lends $90 to Gates. Effar Bank has $90 in loans, $10 in deposits, but MOTS’s balance still shows the full $100.

Then, MOTS writes a check for $100, and his bank balance now shows $0.00.

Under a free banking system, unless the recipient of MOTS’s check is a client at the same bank as Mr. MOTS, the recipient of the check will deposit the check in his own bank. When his bank attempts to redeem the check, the bank of Mr. MOTS is found to be insolvent.

Under central banking, the central bank will coordinate this process by essentially acting as a clearance house. It will make sure that all banks expand at the same rate so that the above doesn’t occur. If Mr MOTS’ bank also receives a deposit by one of its clients with a check belonging to the same bank that had received the check from Mr. MOTS’ recipient, then the two can cancel out their debts to one another by simple book keeping

@MMMark

Effar bank must replenish $10, somehow, to meet the minimum 10% reserve requirement. At this point, the Fed lends Effar Bank the $10.

Is this incorrect?

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The fed lending banks money is just one of the tools available to facilitate the above coordination process. The major point that you have missed is the multiplier factor that results from the process of credit expansion. At the end of the expansion, the bank will have pyramided approximately $900 on top of the original deposit of $100. So the money supply has increased from $100 to $1000. That’s where most of your inflation comes from.