I'm pretty sure it does limit the amount of debt-money -- as long as there's a reserve requirement.
I don't think that is right. My understanding of finance is that reserve requirements don't constrain lending. Hence the failure of constraint during the 20's despite being on a gold standard.
If bank ABC reserves get low, does...
a.) the finance manager of bank ABC tells the loan manager to slow down / stop loaning & the loan manager agrees
or
b.) bank ABC borrows reserves from the other banks about 1 month later when they must true up the books, and keeps loaning while the economy is rockin. Any further reserve shortages in the banking industry as a whole is supplied by the fed open market action... hence where the fed funds rate comes to play.
the answer is b
http://wfhummel.cnchost.com/banklending.htmlIf the finance manager attempted "a", he would be asked to resign his position by the end of the day. The only real limit on loaning in the current system is bank capitalization (cap = assets - liabilities).
In the long term, reserve requirements can drive the entire banking system to borrow reserves from the fed; and the fed can control the
cost of the reserve borrowing,
not the amount at the same time. Its either one or the other and our system chooses cost via the target fed funds rate. Either choice is plausible, but unlimited reserve borrowing makes the system more stable.
In any case, borrowing reserves from other banks or the fed increases reserves and increases liabilities with 0 net effect on capitalization. Canada, Australia, New Zealand, and Sweden use slightly different systems with NO reserve requirement.
In other words, a bank can lend money up to its capitalization limit. Loaning the money does reduce reserves, but that reserve ratio (if required) can be satisfied weeks after the fact by borrowing from other banks or the fed. This borrowing of reserves does not change the capitalization, and does not change the loan capacity limit. If it is expensive (high fed funds rate) to borrow reserves, this will be reflected in the interest rates on loans given by the bank.