Back at First National ...

Remember, First National had some excess reserves when we left them. Why didn't they increase their profits by lending still more money?

To get its money, Second National will deposit James' check with the Federal Reserve, and the Fed will deduct that amount from First National's account, reducing First National's reserves. This is called "clearing" the check.

Let's see what happens when Second National presents James' check for clearing:

Table 3D

First National Bank of Enumclaw
	deposits	78333.3333
6	check clears	-8333.3333
	total deposits	70000
	required reserves	11666.6667
	actual reserves	11666.6667
	excess	0

As we see in Table 3 part D, after the check is cleared, First National is left with exactly its required reserves -- no excess. That's why First National limited its lending at the first stage -- the bank management knew that the loan check would clear, and they had to allow for that in lending from their excess reserves. They are left with a profitable $8,333.33 loan as an asset, and the money supply (checking accounts) has increased by $10,000 (the initial deposit) plus $8,333.33 (James Roe's loan) = $18,333.33.

But Second National Bank has excess reserves, and they can increase their profits by making a loan.

The Money Multiplier