# The Ratio of Currency to Deposit

The Ratio of Currency to Deposit
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The currency-deposit ratio refers to the relationship between the amount of cash a person holds and the amount of money she maintains in readily accessible bank accounts, such as checking accounts. The formula for the currency-deposit ratio is cr = C/D.

## The Ratio in Practice

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Say you have \$62 on your nightstand and \$1,872 in a checking account. You write your currency-deposit ratio as cr= 62 / 1872 or 0.033. The more cash you keep on hand compared with your total deposits, the higher your currency-deposit ratio. For example, if you keep \$800 in cash and \$800 in a checking account, your currency-deposit ratio rises to 1.00.

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## Relevance to Banking

The Federal Reserve requires banks to keep a percentage of all deposits in reserve. The bank cannot loan or invest its reserve funds. If the average currency-deposit ratio increases, meaning that everyone keeps more cash on hand, banks' ability to lend decreases. The decrease in available money to lend makes every loan a bigger risk for the bank. The increased risk drives up interest rates. This combination of factors, if left unchecked, can stifle economic growth and job creation.