Inflation serves primarily to redistribute wealth between debtors and creditors. Members of the economics profession, all the way from professors to students, are currently operating with a basically incorrect paradigm of the way modern banking systems operate and the causal connection between wages and prices, on the one hand, and monetary development on the other. Were it to attempt to do so, the liquidity of the banking system would be imperiled. Banks do not wait for excess reserves before providing new loans to the public. Nor are new loans made at the initiative of the banks themselves.
Banks are essentially in the business of selling credit.
As with all firms the amount of goods and services they can sell depends ultimately on the demand for their product. Bank credit standards vary inversely with the interest rate charged, because the higher the interest rate the lower is the loss-earnings ratio per dollar of bad debts. This is one reason for the rise in credit often observed in the face of higher interest rates. The Fed supplies reserves on demand so that any reduction or increase in the required reserve ratios will be accompanied by a completely offsetting fall or rise in the Federal Reserve security holdings so as to maintain interest rates unchanged and the money stock demand-determined. Central bank open-market transactions are overwhelmingly defensive.