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Bank A
Citibank
Assets
Equity & Liabilities
IOUs from Macy’s
+ $800
Demand deposits
to Jones & Co.
+ $1,000
to Macy’s
+ $800
Reserves
+ $1,000
Total assets
+ $1,800
Total demand deposits + $1,800
F
IGURE
11.3 — C
REDIT
E
XPANSION WITH
C
OMPETING
B
ANKS
:
T
HE
F
IRST
B
ANK
have $200 left to offset the $1,000 demand deposit owed to
Jones & Co. (It doesn’t 
have
to offset the Macy’s deposit any
longer because that has already been transferred to ChemBank.)
Figure 11.4 shows what happens as the result of the loan of $800
to Macy’s, and the spending by Macy’s of $800 on the Smith Fur-
niture Co. which deposits the check in ChemBank. 
Note what has happened. Bank A, Citibank, having expanded
the money supply by 80 percent on top of $1,000, is now out of
the picture. Ultimately, its increase of the money supply is back to
the original $1,000, but now another bank, Bank B, is exactly in
the same position as Citibank had been before, except that its new
reserves are $800 instead of $1,000. Right now, Bank A has
increased the money supply by the original reserve increase of
$1,000, but Bank B, ChemBank, has also increased the money
supply by an extra $800. Note that the increased $1,000 in total
reserves at the Fed has shifted, so that there is now a $200
increase to Bank A and an $800 increase to Bank B. 
And so ChemBank is in the exact same position as Citibank
had been, except to a lesser extent. Citibank had enjoyed a new
reserve of $1,000; ChemBank now enjoys a new reserve of $800. 
Central Banking: The Process of Bank Credit Expansion
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Bank A
Bank B
Citibank
Chembank
Assets Equity & Liabilities Assets Equity & Liabilities
IOUs from 
Demand 
Demand 
Macy’s
deposits to
deposits to
+ $800
Jones & Co.
Smith
+ $1,000
+ $800
Reserves
Reserves
+ $200
+ $800
Federal Reserve
Assets
Equity & Liabilities
U.S. Government
Demand deposits to banks
Securities
+ $1,000
Citibank
+ $200
Chembank
+ $800
F
IGURE
11.4 — C
REDIT
E
XPANSION WITH
C
OMPETING
B
ANKS
:
T
HE
F
IRST AND
S
ECOND
B
ANKS
Where the reserve came from is unimportant. ChemBank pro-
ceeds to do exactly the same thing as Citibank had done before:
expand on top of its new reserves by another 80 percent. That is,
ChemBank makes a loan of $640 to someone else, by writing out
an increase in the latter’s deposit account. Suppose that Chem-
Bank lends $640 to Joe’s Diner. ChemBank’s balance sheet is now
as shown in Figure 11.5. 
The analogy with Figure 11.3 is clear. ChemBank has
expanded on top of its new reserves by 80 percent, lending that
out to Joe’s Diner. 
But Joe’s Diner, too, does not borrow in order to stay idle. It
takes the $640 and, say, purchases a new counter from the Rob-
bins Appliance Co. The Robbins Appliance Co. keeps its accounts 
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Bank B