The Interest Rate

[MMMark]

Fri. 10/04/09 19:25 EDT
.post #54

@DD5

[url=The Interest Rate - #16 by DD5]You should read this:

http://mises.org/Books/mysteryofbanking.pdf[/url]

Thanks. Believe it or not, I read the first edition in October, 1988, and the second edition last August. Although I don’t understand everything in this book, I do understand inflation via the “money multiplier.” I think the wiki article on Fractional Reserve Banking gives a straightforward explanation, as well.

@Esuric

The point you’re missing, I believe, is the fact that banks pyramid credit on top of the monetary base (reserves) by creating deposits. The amount to which they can do this is determined by the reserve ratio (lower RR extends this process; high velocity).

If this is a description of “the money multiplier” as illustrated in the wikipedia article, then I understand this point and am not missing it.

@Esuric

This, in turn, allows banks to continuously lend,

Yes…

@Esuric

and reduce their reserves below the regulatory limit of 10%

I don’t see how this follows.

@Esuric

(lowering the interest rate(s)).

More dollars lent x lower interest rate = same profit (more or less) as before? This, I understand.