Ok, so the cartoon I was referencing wad mad by the Fed. It was of little consequence really I just remember seeing it long ago and it describes exact what you describe. 10% reserve means 10 deposit so loan 9.
So that's right, like you're not wrong. It just helps my mind to think inversely of it which is the same.
You deposit 10 in a bank. There's 10 in the vault and 10 in your account and 10 less in circulation.
All balanced, no new supply.
I come to your bank and borrow 9 because I can't afford grip tape for my board so I go buy some with the loan.
So at this point you still have 10 on deposit in your account right? You have demanded no withdrawal. And I have put 9 in circulation right?
So the original 10 deposit plus the new 9 in circulation has become now 19 in money supply. You and I helped create 9 new units in the supply of currency facilitated by the bank vetting us both right?
So the skateboard shop I got the grip tape from deposits that 9 I got on loan from your deposit in their bank.
Now, someone borrows 8 from that deposit for a gallon of gas in California. So there's 8 new units in circulation that didn't exist before the loan because the depositors account still says 9 even though the vault only retains 90 cents.
And this goes on 7, 6, 5, ect. until your original 10 deposit facilitates 100 in new circulation/deposits that didn't exist before your deposit.
So I just presented this kind of inversely, but it's still the same. 10% of 100 is 10 like you say which is 90% Elasticity for that specific transaction but when you deposit the 90% over and over and over you see the initial deposit ends up having 900% Elasticity. It's all the same, you're not technically wrong. It's just better to look at the big picture really because it's much simpler.
But thinking the currency supply can't expand beyond deposits is just a logic error, not a technical one.
So if the currency supply could not expand beyond deposits then you would be dealing with and using instruments (bills, notes, ect.) we would call non-negotiable. Basically, you would be on a gold or a bitcoin standard. So are you like a gold bug? Lots of that going around lately and it's totally understandable when dealing with inflation. The currency we use as the world reserve currency is not non-negotiable for this very reason, the ability to expand and contract.
So you said you studied this so let's just reiterate how the money supply is totaled. It's deposits + circulation.
So the way you describe is only true if your original deposit of 10 only has demand withdrawal of 1 after I borrow 9 for griptape. But that's just not the case, your original 10 is always available to withdraw in full.
And BTW depositors demanding withdrawals beyond a banks liquidity forcing them to sell off securities or whatever at a loss happens a lot. They're basically insolvent by nature. It's what we call a bailout where the Fed creates reserve deposits through open market operations to deal with insolvencies quickly exactly as you described in your first sentences.
So that's a tiny bit more complicated because that is dealing with the collateral you bolded earlier mostly but it's the same in that it creates new currency that didn't exist before.
So the collateral must be as you bolded in a 1:1 ratio for currency created. Mostly this collateral is provided by our Congress on our behalf for the greater good. The collateral in whatever form, treasuries, bonds, sdr's or whatever are obligations of The United States and they are simply printed as easily as the currency.
You and I are bonding these obligations via endorsement with every transaction. This bond is the full faith and credit of The United States.
I think this is sort of important to grasp because you and I have levied this on the entire world and we sold it to them on the promise that the currency was as good as gold, that is, non-negotiable; which was basically a big fat lie.
