Banks don't look at their reserves to see if they can make a loan. They borrow the money they need at wholesale rates and loan it out at retails rates. The loans they make are bank assets. They can borrow against them. Currently there is no fixed reserve requirement. Rather than controlling aggregate reserve balances, the Fed has joined the other advanced nations in using a different mechanism to control the funds rate.If the bank manager believes they may be short of needed reserves they will borrow from another bank at the overnight fed funds rate. The only real limit to bank lending is demand. Of course the fed influences demand via its funds rate.
Everything you mention after bullet points ... contradicts and points correctly to The Fed creating money.
Overnight lending is not real creation of money. Ok technically it is, but come let's be serious - that is only fiddling around the edges! Nothing like the trillions of long term credit (AKA money crack) to the economy/debt to The Fed created last 10-20 years
2rosy commented: "there is known a limit to this [bank lending] based on reserve requirements" This not correct because banks that are solvent will always be able to meet their reserve requirement one way or another. I just used overnight lending on the intrabank funds market as an example of one of those ways. Currently, however, their is no Fed imposed fixed reserve requirement. I doubt 2rosy realized that. The main point here is that Demand for loans is what ultimately determines the money supply, because the money supply is dominated by "inside" money created when banks make loans...
leonel's post is correct! Both the government AND private sector banks create money. The money the government creates is "outside" money. It is created via deficit spending, and it gets into the private sector by being spent in. At any time, most of the outside money is present in the form of Treasury securities. Outside money remains permanently in the private sector until taxed away.* The money banks create is "inside" money. Inside money is temporary money. It appears when a loan is made and it disappears when the loan is paid off. The vast majority of the money supply in the private sector at any time is "inside money" ! The amount of inside money depends on demand for credit. Demand decreases as the amount of credit issued increases, but the functional form of this relationship is far from linear; thus the "credit and business cycle". The amount of credit money in the economy usually dwarfs the amount of "outside" money created by the government via deficit spending, because most of outside money is present in the form of Treasuries which, although they are a form of money, are not a part of the "money supply." __________________ *This paragraph highlights a conflict between orthodox, Twentieth-Century economics and heterodox, modern money theory (MMT) economics. In orthodox economics, if the government desires to spend in deficit it will have to borrow from the private sector, thus no new money is created by deficits. In MMT economics, the government does not borrow to spend in deficit but instead creates new money. According to MMT economists, the latter is what the U.S. Government does when it spends in deficit.
The obvious answer --- you should have thought of this --- is that Banks can not create an infinite amount of money because Demand is not infinite. And that's true in my world and in your world.
The FED creates money by setting the cost of money (rates). Lower rates, more money. Higher rates The FED increases and decreases (mostly the later in modern times) the amount of money in circulation through the setting of interest rates. Lower rates, more money. Higher rates, less. Not rocket-science. Plus QEeeeeeeeeeeeee's and the "magical" fractional banking system created by gubmint. Private banks are just a mechanism that allows it all to happen.