Money supply in the United Stated is expanded in line with a fractional reserve policy. This policy whereby the banks retain a fraction of their total deposits, and are then able to lend the rest means there will always be a constantly expanding money supply, and this will always be a multiple larger than the actual amount of base money that is made by the Federal Reserve. This multiple is known as the money multiplier and is calculated by the Federal Reserve based around its reserve requirement and other fiscal regulations.
The importance of financial intermediation cannot be understated, as this is required in order to manage the banking and monetary system and to try and avoid banking panics, to serve as the central bank for the government, and to manage the nations supply of money through economic policies which try to maximize employment, minimize taxation, and produce positive gross domestic product.
The significance of bankers taste for excess reserves on the Feds ability to expand the money supply shows that the fractional reserve system is not perfect and that to gain maximum control over the money multiplier and the supply of money, reserves are needed to manipulate fiscal information to the bankers benefit. These assets are counted as reserves due to the fact that they are not necessary for the bank to hold these reserves as collateral against its lending, hence they are considered excess. The banks could use these reserves to aggressively increase loans or investments if they so wish. This is a key factor to consider here, that the bankers taste limit the power of the Fed, as they may be able to undermine the central banking system of the United States by manipulating the money supply.
Quotations Page. 13 May 2010