Cash In Fractional Reserve Banking

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The Role of Cash Reserves in Fractional Reserve Banking

1. Introduction
The essay seeks to explain the function that cash reserves play in the fractional reserve banking system. Two types of banks operate in this banking system, monetary savings banks and private commercial banks, both banks are unique in a sense of their ability to create money. This ability is explained that, these banks keep fraction of their outstanding deposits liabilities as cash in reserves against these deposits in the process of providing loans and spending. The focus of the essay will be on commercial banks, as they have added odd ability of money creation with its own debt. Monetary savings banks use cash only to finance lending in the process of creating money.
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It is imperative to explain the contrast between cash and money. Many things have been used as money over time - gold and silver coins, clay, salt, cigarette or sea shells and currently paper money. The most important basic idea of what money is its function as a medium of exchange. To function as medium of exchange, it must be generally accepted and trusted in exchange for goods and services as well as in payments. Michael McLeay (2014, p. 1) “There is not universal agreement on what money actually is” and Professor Niall Ferguson (Documentary: Ascent of money, 2009) notes “money is a trust inscribed, and it doesn’t matter what it is inscribed on”. Everyone can accept it and trust everyone else accepts it in payment and exchanges it for goods and services. Money has two types which is definitive money and derivative money. Definitive money that is currency/ cash that is hard money (precious metal coins - gold or silver, central bank money - notes and token coins). Derivative money which is a debt money ‘just a piece of paper’ (notes, bills and bank money), which acknowledges a debt and a promise to pay, is convertible into definitive money (cash). UNISA (2017a, p.37) definitive money is thus the money of which derivative money expresses a debt and into which derivative money is convertible. Cash is liquid asset which cannot be converted into any other money but can be…show more content…
The deposits of commercial banks are converted into central bank notes and which are converted into gold. Gold function as a cash reserve against the central bank notes and deposits as well as deposits (bank money) issued by private banks convertible into notes and these notes are convertible into gold. UNISA (2017a, p.131) gold is the definitive-definitive money of the system. Gold is simply primary cash reserves of central banks and central bank notes are primary cash reserves of commercial banks. Cash needs of commercial banks are satisfied by the central

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