cash drain

cash drain

a constraint on the expansion of the MONEY SUPPLY through BANK DEPOSIT CREATION, caused by individuals retaining larger amounts of cash than usual. This means that not all of the increase in cash calculated by using the reciprocal of the RESERVE ASSET RATIO is passed on from the public back into the banking system. For example, a new deposit of £100 is made into the banking system. Assuming a 10% reserve asset ratio, the average fraction of money held in cash form is one-tenth and the reciprocal 10. Thus ultimately a £1,000 increase in money supply is theoretically possible. If the public's demand for cash grows, however, then the increase in the money supply will not be 10 times the initial deposit, but something less.
Mentioned in ?