If enough money is withdrawn from banking system then cash becomes king and banks will have to call in their loans to satisfy the reserve requirements. Infect banks will have no reserves because they always lend out more cash then in the vaults.
Cash can be king if only its in cash
QUOTE
Once the Fed has bought something and paid for it with “reserves” thus created out of thin air, Phase II kicks in. Phase II is controlled by the banks and the banks’ customers in what remains in form, despite the ethereal quality of it all, a fractional reserve banking system. The new reserve asset, which the vendor bank received in payment from the Fed, gives the bank the power to begin a process of creating more new money. The aggregate amount of new money that can be created is a multiple of the new reserve asset, equal to the reciprocal of the marginal reserve ratio, today, 10.
To illustrate this process, Rothbard walks us through it, step by step.[5] Say the Fed buys an asset for $10 from Big Bank One. That $10 will support another $100 of fresh money in the banking system in the form of new customer deposit accounts. But the new $100 doesn’t materialize all at once, or on the books of Big Bank One alone. Instead, it comes into being as the result of a gradual series of loan transactions that Big Bank One sets in motion. In what Rothbard calls a “ripple effect”, Big Bank One lends out a portion of the $10, namely $9, (1 minus the reserve requirement, or .9, times $10). That $9 ultimately gets deposited at Big Bank Two, which is the second stop in the series. Big Bank Two lends out .9 times the $9, or $8.10, and so forth, throughout the series. At the end of the series, the total new money thus created in the form of fresh deposit accounts is roughly equal to $100. Thus is our money borrowed into existence.
The same process works in reverse if the Fed, instead of buying something, sells it. This has the effect of draining reserves from the banking system, and will result in a similarly high powered contraction of the money supply.
http://www.goldensextant.com/SavingtheSyst...ml#anchor264033
To illustrate this process, Rothbard walks us through it, step by step.[5] Say the Fed buys an asset for $10 from Big Bank One. That $10 will support another $100 of fresh money in the banking system in the form of new customer deposit accounts. But the new $100 doesn’t materialize all at once, or on the books of Big Bank One alone. Instead, it comes into being as the result of a gradual series of loan transactions that Big Bank One sets in motion. In what Rothbard calls a “ripple effect”, Big Bank One lends out a portion of the $10, namely $9, (1 minus the reserve requirement, or .9, times $10). That $9 ultimately gets deposited at Big Bank Two, which is the second stop in the series. Big Bank Two lends out .9 times the $9, or $8.10, and so forth, throughout the series. At the end of the series, the total new money thus created in the form of fresh deposit accounts is roughly equal to $100. Thus is our money borrowed into existence.
The same process works in reverse if the Fed, instead of buying something, sells it. This has the effect of draining reserves from the banking system, and will result in a similarly high powered contraction of the money supply.
http://www.goldensextant.com/SavingtheSyst...ml#anchor264033
http://en.wikipedia.org/wiki/Money_creation
