Example of money multiplier effect confusing
The chart does not correspond to the numbers on the graph since the graph stops at K bank loans, which makes the entire example confusing. The chart should be altered to note somewhere that eventually the total deposit size reaches 500 in theory, rather than stopping at 457
Three Fed economists recommend ditching the money multiplier concept in economics teaching
"This outdated link is often tied to the concept of the “money multiplier,” which is anchored in an obsolete explanation of how the Fed operates and influences banks." https://files.stlouisfed.org/files/htdocs/publications/page1-econ/2021/09/17/teaching-the-linkage-between-banks-and-the-fed-r-i-p-money-multiplier_SE.pdf
Definition
There has been some exchange of opinion during the last days in edit summaries on the wording in the first, definitional sentence in the lead. Avatar317 has made this partly reversion, which I do not find quite satisfactory. I think, however, that a consensus could be reached as to a reformulation.
I believe that the present formulation is simply erroneous, the problem being the last part of the definition: that banks are required to keep a certain proportion of their deposits as reserves. This is not true in "almost all" countries today, a considerable number of countries, including some of the economically most important ones, not making any such requirement. I do not think, however, that this last part is a necessary part of the definition. Mankiw 2022, for example, simply says that a FRB system is one in which banks keep only a fraction of their deposits in reserve. This is clearly true of countries such as the US and Denmark, only the fraction is not determined directly by monetary authorities, but by the business policies of the commercial banks themselves. I suggest we simplify the first sentence to reflect this, which would make the "almost all countries" claim true (indeed, I believe it is true for all countries today). I also recommend we mention the hypothetical alternative, full-reserve banking, explicitly in the lead, to clarify what is the alternative to FRB, and explicitly mention some of the countries that do not impose a requirement, mainly the entire core Anglosphere. And then I recommend that we remove the references from the lead entirely, adding some referenced sentences in the main text with the same message that the lead can draw upon, so that the lead does not present statements that are not covered in the main text. Økonom (talk) 08:29, 10 November 2023 (UTC)
- I agree with all your suggestions above: mentioning FRB as the the hypothetical alternative, moving the references, and the rewording. I think we should also mention the history of the diminishing reserve requirement, because IIRC, reserve requirements did exist and were often 5-15% in many countries decades ago. I'm not familiar with the specificity of what they were so I don't have the knowledge to craft that statement, nor have I seen sources covering that history. Separately, I would guess that "almost all countries" would be a more accurate claim than "all countries" since I am guessing that there are a few countries which do not have a functioning banking system. (but I may be wrong). ---Avatar317(talk) 22:46, 10 November 2023 (UTC)
- This is a tricky business because, among other things, there are plenty of otherwise Reliable Sources that are not up to date on current regulation and capital requirements that -- in the limiting case -- define the banking systems. "Fractional" reserve, suggesting a specific fraction or ratio, is now better described as "partial" reserve or someting similar. SPECIFICO talk 03:50, 11 November 2023 (UTC)
That's a VASTLY improved lead from what it was, THANKS!! ---Avatar317(talk) 06:26, 15 November 2023 (UTC)
Explanation of new first paragraph in lede
The previous long standing first paragraph included the words "...keep only part of their deposit liabilities in liquid assets as a reserve, typically lending the remainder to borrowers." which is absolutely at odds with reality. Following a citation previously attached to this claim, it seems these words came from a book co-authored by former Fed Chair Ben Bernanke. So how could such an authority have gotten it so wrong? I could not find the original book but did find a later edition and found the section where the "lending the remainder" idea probably emerged. Then the reason for the contradiction with reality became clear... The book was telling a hypothetical tale, in an imagined "primitive agricultural economy" of "Agricola". It was just a tale told to help students grasp some concepts. I am certain that Ben Bernanke himself would not claim that it corresponded with the real world.
The book was Macroeconomics by Abel, Bernanke and Croushore.
- I note that @Avatar317 undid the edit on the basis that the new paragraph is more confusing... I absolutely agree BUT you can not replace it with a paragraph that makes false claims. @Avatar317 then undid the edit again, this time on the basis that the old paragraph was a better summary of the original. This claim is simply false, The old paragraph is at odds with the article. The false "lend out the remainder" narrative is not told in the main body of the page. Reissgo (talk) 07:48, 29 May 2026 (UTC)
- That is a paraphrase in layperson terms of the method described in the body.
- We had a discussion of how the lead should be phrased in Nov 2023 (see above discussion) and had two editors and myself agree on that version.
- If you want to make specific critiques, we could discuss that. ---Avatar317(talk) 23:10, 29 May 2026 (UTC)
- That old first paragraph discusses the (incorrect) idea of banks lending the remainder of what depositors put into a bank... But that concept is not discussed in the rest of the article... (If you think it is then please tell me where exactly). Also the original reference for the first paragraph does not support the claim. Also, the claim is simply not true. It has to be changed. Reissgo (talk) 07:47, 30 May 2026 (UTC)
- Your source is from a low grade, multidisciplinary, Islamic journal. I strongly suggest you read "Money Creation in the Modern Economy" By McLeay et al, published in the Bank of England Quarterly Bulletin, with 2248 citations to date. Almost certainly the most authoritative paper on the subject in existence today. Amongst other things, the paper describes how many other sources contain misinformation on the subject. If what you want to say contradicts Mcleay et al, then you are probably wrong. Reissgo (talk) 08:06, 3 June 2026 (UTC)
- You are missing the point; your source discusses MONEY CREATION, NOT Fractional Reserve Banking. This article is not about MONEY CREATION, and that source never mentions it. While that source isn't wrong, we aren't introducing the reader to how money is created in the modern economy. We have a separate article for that, and a section here that introduces it. ---Avatar317(talk) 21:27, 4 June 2026 (UTC)
- Also, the source is about the UK's banking system, which isn't actually a Fractional-reserve banking system. So what McLeay has to say isn't really relevant to this article. MrOllie (talk) 21:37, 4 June 2026 (UTC)
- "Fractional reserve banking", described correctly or incorrectly, creates much more money than the original sum of cash in the system, so it is impossible to describe it without discussing money creation. IMHO Wikipedia should not have a separate article on money creation.
- Are you claiming that the Wikipedia page on fractional reserve banking is not supposed to describe the monetary system as it exists in the real world today? If so, you had better edit it to make that point clear! Reissgo (talk) 14:51, 5 June 2026 (UTC)
- I suppose that depends on what you mean by 'the monetary system as it exists in the real world today' - if you mean the monetary system in the UK or the US, no, since those countries have no fractional reserve requirement any more. If you mean the monetary system as it exists in China or India, then yes, but you haven't provided any sources that say we have a problem in that. MrOllie (talk) 14:59, 5 June 2026 (UTC)
- Also, the source is about the UK's banking system, which isn't actually a Fractional-reserve banking system. So what McLeay has to say isn't really relevant to this article. MrOllie (talk) 21:37, 4 June 2026 (UTC)
- You are missing the point; your source discusses MONEY CREATION, NOT Fractional Reserve Banking. This article is not about MONEY CREATION, and that source never mentions it. While that source isn't wrong, we aren't introducing the reader to how money is created in the modern economy. We have a separate article for that, and a section here that introduces it. ---Avatar317(talk) 21:27, 4 June 2026 (UTC)
- Your source is from a low grade, multidisciplinary, Islamic journal. I strongly suggest you read "Money Creation in the Modern Economy" By McLeay et al, published in the Bank of England Quarterly Bulletin, with 2248 citations to date. Almost certainly the most authoritative paper on the subject in existence today. Amongst other things, the paper describes how many other sources contain misinformation on the subject. If what you want to say contradicts Mcleay et al, then you are probably wrong. Reissgo (talk) 08:06, 3 June 2026 (UTC)
@MrOllie, Let me get this straight... Your claim is that the main article is about a system that simply does not exist in the US and UK and yet the vast majority of the sources upon which it relies are discussions of the US and UK banking systems?
And presumably, following from your logic, in the US and UK private banks do not generally lend out the money placed with them by depositors, but in China and India they do?... As I typed those words I thought I'd just check and I found a paper called "From Loan to Deposit: Money Creation by Banks and the Significance of Cash Reserves" by Arnab Kumar Chowdhury who works at the Reserve Bank of India. That paper is in line with McLeay et al and directly contradicts the idea in the opening paragraph that "banks that take deposits from the public keep only part of their deposit liabilities in liquid assets as a reserve, typically lending the remainder to borrowers." Reissgo (talk) 21:45, 5 June 2026 (UTC)
- Re: "Let's see those "multiple high quality sources" you CLAIM but haven't shown".
- I know this lot isn't properly formatted but you get the idea:
1. Mcleay et al
2. The Arnab Kumar Chowdhury paper as discussed earlier
3. Lord Adair Turner, former head of the UK's Financial Services Authority Conference on: "Towards a Sustainable Financial System" "Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo [out of nothing] – extending a loan to the borrower and simultaneously crediting the borrower’s money account"
4. Michael Kumhoff, Research Department, International Monetary Fund IMF Working Paper "Bank reserves"... "do not play any meaningful role in the determination of wider monetary aggregates. The reason is that the 'deposit multiplier' of the undergraduate economics textbook, where monetary aggregates are created at the initiative of the central bank, through an initial injection of high-powered money into the banking system that gets multiplied through bank lending, turns the actual operation of the monetary transmission mechanism on its head."
5. Paul Sheard, Head of Global Economics and Research, Standard and Poor's "This goes against the grain of the usual way of describing bank lending, which suggests that banks "collect" deposits and then "lend them out." That is not the way it happens at all."
6. Piti Disyatat, Monetary and Economic Department, Bank for International Settlements BIS Working Papers "loans drive deposits rather than the other way around."
7. Deutsche Bundesbank (April 2017), The Role of Banks, Non-banks and the Central Bank in the Money Creation Process. "This refutes a popular misconception that banks act simply as intermediaries at the time of lending."
- Perhaps the most important thing for me to mention here is that the bulk of the page is generally compatible with McLeay et al... The "lending the remainder" concept is not mentioned anywhere else. Reissgo (talk) 09:36, 10 June 2026 (UTC)
- We describe things as done by MAINSTREAM economics; if some people claim the TEXTBOOKS ARE WRONG than we need LOTS of sources to claim that the existing consensus is wrong, per WP:EXTRAORDINARY.
- If you want to be convincing, you need to provide LINKS to those sources you CLAIM support this, because your cherry-picked quotes likely don't tell the whole story. ---Avatar317(talk) 00:17, 11 June 2026 (UTC)
- Perhaps the most important thing for me to mention here is that the bulk of the page is generally compatible with McLeay et al... The "lending the remainder" concept is not mentioned anywhere else. Reissgo (talk) 09:36, 10 June 2026 (UTC)
- Actually not quite WP:EXTRAORDINARY because actually the textbooks don't make the claim very strongly. The Bernanke book that was the original support of the "relending" sentence only described a toy model of fractional reserve banking based in the fantasy land of Agricola. They never claimed it corresponded to reality! As another example, the main article used to rely on a paper published by the St Louis fed called "Modern Money Mechanics"... That paper described the money system using the "relending" argument, just like you want to put here... BUT then you read on towards the end of the paper an it says "Of course, they do not really make loans out of the money they receive as deposits. If they did this, they would be acting just like financial intermediaries and no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits they make to the borrowers’ deposit accounts."... So after all that misinformation in the bulk of the paper they end up saying (metaphorically) "sorry, for the misinformation, that was just to make the teaching easier... reissgo was more accurate all along!".
- Having said all that, I suggest to you that the sources I described are WP:EXTRAORDINARY... Just look at the calibre of the people/organisations that I'm quoting.
1. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
4. https://www.elibrary.imf.org/view/journals/001/2012/202/article-A001-en.xml
6. https://www.bis.org/publ/work297.pdf
With regard your edit note that I am disrupting the previous consensus: - that is immaterial because super-strong evidence from the highest quality imaginable sources (mostly central banks - the people that run the system), state that the old initial sentence contained a falsehood. Repeatedly re-inserting that falsehood is tantamount to vandalism IMHO. Reissgo (talk) 07:25, 13 June 2026 (UTC)
- It is very material that you have not secured a consensus in favor of your proposed changes to the article - see WP:ONUS and WP:CONSENSUS. To proceed you must secure agreement from other editors here on this talk page. Repeatedly re-inserting the change that you prefer plainly is edit warring, and falsely accusing others of vandalism will not get them to agree with you. MrOllie (talk) 18:33, 15 June 2026 (UTC)
- I have just supplied an avalanche of the highest possible quality sources stating unambiguously that the old leading paragraph was factually incorrect and all you can do is state that I need consensus? IIRC wiki does indeed want a consensus reached when there are two sides having an argument... but where is your argument? You appear to have capitulated. IIRC, if there is no argument then the presentation of reliable sources is sufficient to make edits. Reissgo (talk) 20:15, 15 June 2026 (UTC)
So let me summarise this conversation so far:
Reissgo: "The first sentence in the lead is factually incorrect as evidenced by this paper."
Others: "We need more evidence"
Reissgo: "OK, here is some."
Others: "We need even more evidence"
Reissgo: "OK, here is even more."
Others: "We need even more evidence"
Reissgo: "OK, here is even more."
Others: "we still don't agree"
Reissgo: "why not? The evidence seems irrefutable!"
Others: tumbleweed ... (+false allegation of sockpupptry).
How can a consensus even be reached if one side does not put foreword their position? Reissgo (talk) 07:42, 19 June 2026 (UTC)
- @Reissgo the back and forth on this topic feels like its getting beyond a civil definition dispute, maybe outside input would help, Wikipedia:Dispute resolution requests/Guide? Duncnbiscuit (talk) 08:24, 19 June 2026 (UTC)
- Dispute resolution sounds like a good idea. Another idea may be for @Reissgo to compose a version of the lead that they see as technically accurate, but is also comprehensible to a layperson with no economics education. Per WP:ONEDOWN, this should be written so that someone in secondary school can understand it. This seems to be the main objection of those opposing the rewrite, so perhaps by addressing it we could find some kind of agreement. Toadspike [Talk] 09:22, 19 June 2026 (UTC)
- I made a concrete proposal below. I think the word "remainder" should be changed, because it is wrong. TurboSuperA+[talk] 15:06, 19 June 2026 (UTC)
- Thank you
Toadspike(oops! I meant @TurboSuperA+) for your good faith contribution but I can not support your proposal. The ever decreasing series of loans tale simply bears no relation to reality despite being told to so many students in undergraduate textbooks. This is confirmed by many central bank sources. Reissgo (talk) 20:27, 19 June 2026 (UTC)- The bigger problem here is that Reissgo wrongly believes that they even understand the sources they are finding here. The sources posted don't describe "fractional reserve banking", they describe "money creation". That is a different article.
- Thank you
- I made a concrete proposal below. I think the word "remainder" should be changed, because it is wrong. TurboSuperA+[talk] 15:06, 19 June 2026 (UTC)
- Dispute resolution sounds like a good idea. Another idea may be for @Reissgo to compose a version of the lead that they see as technically accurate, but is also comprehensible to a layperson with no economics education. Per WP:ONEDOWN, this should be written so that someone in secondary school can understand it. This seems to be the main objection of those opposing the rewrite, so perhaps by addressing it we could find some kind of agreement. Toadspike [Talk] 09:22, 19 June 2026 (UTC)
- The sources I have given describe the workings of our monetary system as it functions in the real world today. Central bankers themselves often still refer to our monetary system as a fractional reserve one even if the reserve requirement happens to be zero. After all, the amount of reserves in the system are still a fraction of the total money supply even if that fraction is not specified by a reserve ratio. It is not possible to separate money creation from the workings of our monetary system because even the act of making a loan creates money. Reissgo (talk) 07:29, 20 June 2026 (UTC)
- With regard @Toadspike's suggestion that I should suggest an opening written so that "someone in secondary school can understand it"... I would choose an opening sentence of: "Fractional reserve banking is a monetary system in which a 'loan' is in fact an IOU swapping exercise, in which a borrower's non-spendable IOU (the loan agreement) is exchanged for spendable IOUs from the bank (demand deposits)."... I believe this is technically accurate and supported by the highest grade sources. The sentence is merely a reflection (in everyday language) of the fed's own words in Modern Money Mechanics when they said "What they do when they make loans is to accept promissory notes in exchange for credits they make to the borrowers’ deposit accounts". Reissgo (talk) 12:24, 24 June 2026 (UTC)
First sentence
The first sentence of the lede contradicts the cited source and provided quotation. The first sentence says
...keep only part of their deposit liabilities in liquid assets as a reserve, typically lending the remainder to borrowers.[1]
"The bank is required to maintain a 10% reserve, but it lends out 90% of the amount, creating a loan that is treated as an asset. The money supply is thereby increased once from USD 1000 to USD 1900 due to this initial deposit of USD 1000."
"90% of the amount" != "remainder". The quoted source even goes on to say that the money supply increased by $900 to a total of $1900. If you lend out only the remainder, then how can you end up with more money in the end? You can't. Besides, only a small fraction of the money supply is in actual cash. When the bank "lends" 90% of the deposited amount, they credit the borrower's account with $900.
- This is how it works: Person A deposits $1000 into their account at the bank. Now the bank has $1000, but it can only give out $900 in loans (in this example reserve is 10%) based on the $1000 deposited. Person B comes along and wants a $900 loan from the bank. The bank doesn't take $900 from Person A's account, because that would be stealing. The bank credits Person B's account with $900. Now Person A has $1000 in their account, Person B has $900, and the bank has $1900.
Therefore, the word "remainder" doesn't work, nor is it supported by the cited source, and it only confuses readers. TurboSuperA+[talk] 21:05, 15 June 2026 (UTC)
- How is 100% - 10% leaving 90% NOT the remainder? (It's what remains after you subtract the reserve requirement, the 10%). I don't understand how you see this as confusing. Would the word "the rest" rather than "the remainder" sound better? ---Avatar317(talk) 23:50, 19 June 2026 (UTC)
- Bwcause it is not "100% - 10%", it is "90% of the amount". The deposited amount still remains in the original account, the bank doesn't take the person's money. When you put money in the bank, it stays there, yes? You don't suddenly see 90% of it disappear. Or 100% in the case of the countries without any reserve.
- That's another example. Some countries do not have a reserve amount. Those banks can lend out 100% of the deposited amount. I think people would be pissed if their money suddenly disappeared.
- If it sounds like the bank is creating money, that's because it is. Only a tiny percantage of money is actual, printed cash.
- Here, try this: https://www.economicshelp.org/blog/667/money/banks-and-the-creation-of-money/
- It might explain it better. TurboSuperA+[talk] 03:18, 20 June 2026 (UTC)
- Actually, LEGALLY, you do see the money disappear. Your deposit is a "liability" for the bank, and you get a promissory note which the bank promises to pay you back WHENEVER you decide to withdraw the money, but the bank now officially "owns" your money and can legally lend it out. That's why the Fed acts as the backstop to prevent bank runs when the bank has insufficient liquidity to pay its promissory notes to depositors if they should all want to exercise their promisory notes at once. ---Avatar317(talk) 05:02, 20 June 2026 (UTC)
Actually, LEGALLY, you do see the money disappear.
That is too technical I explained how "remainder" is the wrong word if we're trying to explain the concept to a lay audience. The money you put in the bank is there, for all intents and purposes. If you check your account you see the dollar amount, it doesn't say "There's only 10% left in your account, but as soon as you request the rest of your money we promise to give it to you." TurboSuperA+[talk] 05:17, 20 June 2026 (UTC)- The current wording is: Fractional-reserve banking is the system of banking under which banks that take deposits from the public keep only part of their deposit liabilities in liquid assets as a reserve, typically lending the remainder to borrowers.
- Would this wording be better: "Fractional-reserve banking is the system of banking under which banks that take deposits from the public keep only part of their deposit liabilities in liquid assets (the reserve requirement) and lend the rest to borrowers."
- Or how would you word it? ---Avatar317(talk) 22:56, 23 June 2026 (UTC)
lend the rest to borrowers
should be "lend a percentage to borrowers, thus increasing the money supply by the loaned amount." I'm not making this up. This is supported by the very citation that is already in the lede:The bank is required to maintain a 10% reserve, but it lends out 90% of the amount, creating a loan that is treated as an asset. The money supply is thereby increased once from USD 1000 to USD 1900 due to this initial deposit of USD 1000.
TurboSuperA+[talk] 13:16, 24 June 2026 (UTC)
- Actually, LEGALLY, you do see the money disappear. Your deposit is a "liability" for the bank, and you get a promissory note which the bank promises to pay you back WHENEVER you decide to withdraw the money, but the bank now officially "owns" your money and can legally lend it out. That's why the Fed acts as the backstop to prevent bank runs when the bank has insufficient liquidity to pay its promissory notes to depositors if they should all want to exercise their promisory notes at once. ---Avatar317(talk) 05:02, 20 June 2026 (UTC)
I have elected to make this into its own section because it is kind of separate from "Explanation of new first paragraph in lede" which is all about the question of whether or not the lede should reflect the central bank view (McLeay et al) OR the "textbook" view (Bernanke's Agricola tale). This debate is currently subject to a dispute resolution process. The "First sentence" section is all about the question of "IF we assume the Bernanke/Agricola tale THEN exactly how should we phrase it". Reissgo (talk) 15:40, 24 June 2026 (UTC)