# Banking and its effects on the money supply and asset bubbles: Part 3

### What does a fractional-reserve system of banking do to the money supply?

Dear Reader,

In Part 1 of this series we dissected what a bank does at its core.

In Part 2 we looked at how a fractional reserve banking system works.

Now we will discuss what a fractional reserve system does to the monetary supply - that is the total amount of money people have available to them to spend.

As you will recall, in this fractional-reserve banking system we can do much more lending than just the amount we hold in deposits. The less we need to hold in deposits, the more lending we can do. But, there is a mathematical upper limit to how much lending can be done. That upper limit depends on the fraction of the deposit that we are required, or decide, to hold. We will call this the reserve ratio.

If that fraction is 100%, then we cannot make any loans as all 100 coins that our first customer put into our vault have to be kept there. If that fraction is 50%, then we can loan out 50 coins the first time, 25 the second, 12.5 the third, 6.25 the fourth, 3.125 the fifth, and so on un…