The Fed influences the amount of money that banks can create by changing the structure of reserve banking system at two levels – adjustments and adaptations.

Adjustments consist of short-term, easily reversible, structural changes. To this point we have discussed one of the most consistently used forms of adjustment: raising and lowering the quantity of bank reserves by buying and selling securities with The Banks—open market operations.

Adaptations consist of long-term, less easily reversible, structural changes. The most significant adaptation to the banking structure that The Fed can make to influence the ability of banks to create money consists of changing the required reserve ratio.

On the next few pages I will show the effect of changes in the bank required reserve ratio.