# Given fractional banking and the multiplier effect, for every dollar in circulation, how many dollars in spendable money exist?

The fractional banking system, in a nutshell, allows banks to invest the money deposited in them, and then for whoever ends up with that invested money to deposit the money back into the bank, which can then reinvest it and so on. For example, let's say Mike puts \$1000 into a bank. The bank might invest \$800 of those dollars into a factory, which then pays the \$800 to its workers that themselves deposit their \$800 into the bank. So while Mike's bank account balance still reads \$1000, the workers' bank accounts include \$800 of those same dollars that have been paid out on loan from the bank, meaning the bank has effectively turned Mike's \$1000 into \$1800, and can loan out that same \\$800 to triple dip, quadruple dip, and so on ad infinitum.

In practice, in the world and the United States, how many spendable dollars are created for each actual dollar in circulation, M0 to M1?

• Most large financial transactions do not involve dollar bills. Most money is created when commercial banks lend money to their customers rather than being printed by the Federal Reserve. So what do you regard as an "actual dollar" and what as a "spendable dollar". Nov 21, 2016 at 23:48
• @Henry M0 vs M1, no credit. I'm just looking to quantify the multiplier effect Nov 21, 2016 at 23:51
• The St Louis Fed publishes downloadable data on a multiplier (the ratio of M1 to the Monetary Base) at fred.stlouisfed.org/series/MULT - it is currently less than 1. The Monetary Base is the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks. You can select more data from fred.stlouisfed.org/categories/24 Nov 21, 2016 at 23:58
• @Henry How does that make any sense at all? Nov 22, 2016 at 0:02
• The banking system collapsed in 2008 when commercial banks stopped making unsecured loans to each other (which is why LIBOR became fictional, since it measured the interest rates of loans that no longer existed). Instead they deposited vast voluntary reserves at the Fed and other central banks around the world, which then had to resort to unconventional methods such as quantitative easing to keep money in the rest of the economy. "Fractional reserve banking" was not a good description of how banking operated before 2008, but it became a nonsense after it. Nov 22, 2016 at 0:13