I was reading Ray Dalio's book on Priciples for dealing with the changing world order, and I came across this statement

At first there are the same number of claims on the "Hard money" as there is hard money in the bank. Then the holders of paper claims and the banks discover the wonders of credit and debt. (Which means there is more claims on "hard money" than there is hard money in the bank)

This did not make sense to me, because money is being taken out from the circular flow in the circular flow model. Circular flow model image

Note: I've never actually learnt economics in school, so I may be missing some of the key elements that looks stupid obvious to an individual that went to school. I have studied microeconomics before through online courses though. Recommendations on easier books to read are welcome.


1 Answer 1


The reason for that is that banks do not keep 100% reserves, hence when they issue new loans they expand money supply and the amount of money in circulation will be much higher that the amount of base money/gold reserves.

  • $\begingroup$ According to my image, the bank does store 10% in reserves, and they reissue out the 90% in terms of loans. This means that 100% is leaking out of the pipe, and 90% is being injected into the pipe. $\endgroup$
    – Bryan
    Oct 16 at 9:58
  • $\begingroup$ @Bryan Banks cannot and do not "lend out reserves". All bank loans create new deposits by extending credit. For the bank, a new loan asset is balanced out with a new deposit liability. For the borrower, a new loan liability is balanced out with a new deposit asset. Change in net financial equity for both parties is zero before and after bank loans being made. $\endgroup$ Nov 15 at 13:18
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    $\begingroup$ @JamieSmith please read the question, the question is about gold standard. Gold standard does not work the same way as fiat system $\endgroup$
    – 1muflon1
    Nov 15 at 23:53

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