Life gets better for Mike Ortiz

©Dick Brunelle, 2006

The sun was unusually strong for February in the Superstition Wilderness Area. Mike had hiked and camped a good part of the 242 square mile area over the last four years. He finally had some time off from his weekend job working in the kitchen of one of the local resorts. Mike was in 2006 senior class at the high school in Apache Junction, Arizona. He had been working hard this year because he wanted to keep his grades up so that he could get a scholarship to college next year.

The work he had been putting into his studies had been good for his mind but had not helped him to get rid of the 5 pounds he had gained. Having the weekend free to hike and camp out overnight was something he had been looking forward to.

Mike started hiking at 6 a.m. It was now 1 p.m. He stopped to rest and eat some trail mix at a spot that he was familiar with. When he was ready to go, he decided against following the trail to the south that hikers always followed from this point. Feeling good from the welcomed exercise of the last seven hours, he decided to go off trail and headed in a more easterly direction. Breaking a new trail is slow going. After 3 hours of walking, he estimated that he had gone only about four more miles. It was time to set up camp for the night. As he looked around for a good spot, he noticed a pile of rocks on the side of the mountain. Curious he started to move some of the smaller pail size rocks and noticed that there seem to be an opening behind the rocks. Sure enough after 30 more minutes of work he was able to wedge himself through the opening into an old abandoned mine.

He set up camp nearby and prepared some food. He was tired and decided that he would investigate the mine in the morning before heading back out of the wilderness area.

In the morning he returned to the mine with his flashlight in hand. A few feet into the mine he saw a name scratched into the rock on the wall: Jacob Waltz. He moved deeper into the mine and found some yellow nuggets. He was sure that they were gold nuggets. Jacob Waltz, gold nuggets, he thought as he began to recollect some local lore. Holy saints in heaven! I found the lost Dutchman’s mine! He put a few nuggets into his backpack and covered up the mine opening with the rocks he had removed.

He took his bearings and marked the spot with the hand-held GPS he used on his hiking treks. He knew he had to keep the mine a secret and that word would spread when he sold the gold nuggets. He concocted a story about finding the nuggets in a location well away from this site. He was going to be prepared when he was questioned. Later he would figure out how to get more of the gold out of the mine.

As he headed home he thought of his good fortune. It had been a great week. He had some valuable gold and he had finally got a date with Greta. He had been asking her out for about a year and a half but she had been seeing Mack Frackell. Finally she had broken off with Mack. Gold and a date with Greta next Friday made life good.

After school on Monday, Mike found a buyer for his gold. He now had $10,000 and decided that he would put it all in an account at the Peralta Bank. On Tuesday, he put the money in the Bank.

Pre-essay assignment:

Mike has now deposited $10,000 in the Peralta bank (bank 1). Money that is deposited into a bank becomes part of the bank’s reserve. Assume that banks are required to keep 40% of reserves as required reserves and the balance is considered excess reserves.

Now we are going to assume that all banks will lend all of the new excess reserves and that the borrowers will deposit all of the loan amount in another bank and that this process will take place a total of 10 times. Complete the following money creation spreadsheet.

solution	Money creation
	by banks
	reserve req = 40%
		bank 1	bank 2	bank 3	bank 4	bank 5
	deposit	10,000	6,000
	tot. new reserves	10,000	6,000
	req new reserves	4,000	2,400
	new excess reserves	6,000	3,600
	loans	6,000	3,600
	deposit	bank 6	bank 7	bank 8	bank 9	bank 10
	tot. new reserves
	req new reserves
	new excess reserves
	loans

Write an essay about money creation resulting from the deposit of $10,000 by Michael Ortiz from Apache Junction. Include a discussion of the following issues:

a. Are the gold nuggets money in both the Pine Gulch story and the Mike Ortiz story?

b. When Ortiz sells his gold nuggets for $10,000 has the money supply expanded? Explain

c. How does money expansion occur in Mike Ortiz’s time?

d. Given your analysis of what happened to Ortiz’s $10,000 and rounding to the next highest thousand, how much additional money was created by Ortiz’s deposit

e. What two changes in the money creation spreadsheet would lead to less money creation? Do not include a change in reserve requirement.