What features of commercial banking make banks unique among financial institutions in their ability to expand the money supply?

Commercial banks are financial institutions that accept deposits from the public and provide loans to individuals, businesses, and governments. The primary functions of a commercial bank include: 1. Accepting deposits: Commercial banks provide a safe place for people to deposit their money. These deposits can be in the form of savings accounts, checking accounts, or certificates of deposit. 2. Providing loans: Commercial banks provide loans to individuals, businesses, and governments for various purposes such as purchasing houses, cars, and funding projects. 3. Money creation: Through the process of fractional reserve banking, commercial banks can create new money in the economy by lending out a portion of the deposits that they receive.

Commercial banks play a crucial role in expanding the money supply by accepting deposits from the public. When people deposit their money in a bank, the bank keeps a small portion of it as reserves and lends out the rest to borrowers. This process essentially increases the overall money supply in the economy as the borrowed money is then spent, further generating income and creating demand for goods and services.

When commercial banks provide loans to individuals, businesses, and governments, they are essentially creating new money. This is because the money that is lent out was not part of the existing money supply before the loan is made. Instead, the bank creates new money by extending credit, which is then used by borrowers to finance their various needs. As borrowers spend the newly created money, it circulates throughout the economy, effectively increasing the overall money supply.

Fractional reserve banking is a system in which banks are only required to keep a fraction of their deposits as reserves while lending out the rest. This allows them to create new money in the economy by extending credit. When a customer deposits money in a commercial bank, the bank lends out a portion of the deposit to borrowers, keeping the remaining amount as reserves. The borrowers then spend the borrowed money, which ends up as deposits in other banks, allowing those banks to lend out a portion of the new deposit as well. This process repeats itself through multiple cycles, effectively expanding the money supply in the economy as new credit is created.

Commercial banks are unique among financial institutions in their ability to expand the money supply due to their role in accepting deposits, providing loans, and creating new money through fractional reserve banking. These functions are interconnected and contribute to increasing the money supply as banks lend out a portion of their deposits, creating new money in the process, and further fueling economic activity and demand for goods and services.