Modern Mechanics of

Money

Workbookabout ReservationsBankingand Expansion of Deposits

Federal Reserve Bank of Chicago
 Modern Mechanics of
Money

Thepurposeofthisbrochureistodescribethe Money is the routine part of every day living.

basicprocessofmoneycreationinasystem existence and acceptance are usually taken
granted. A user may feel that the money
fractionalreservebanking.Theapproach
it must arise either automatically as a result of
adoptedilustratesthechangesinthebalances economic activity as an increase of something
bankingissuesthatoccurwhendepositsinthe Gobiernooperación. Perosólohowthis happens every
banks exchange as a result of the action also frequently remains a mystery.
monetary system of the Federal Reserve What is money?
CentralbankoftheUnitedStates.Therelationships A sidinero is simply seen as a tool
whatisshownisbasedonassumptions used to facilitate transactions, only those
simplifiers.Inthenameofsimplicity,the media that are easily accepted
relationshipsareshownasiftheyweremechanical, in exchange for goods, services, and other assets needed
to be considered. Manythingsfrom stones
buttheyarenot,asdescribedlaterinthe for baseball cards
brochure.Therefore,theyshouldnotbeinterpretedinthe they have fulfilled this monetary function through the
meaningthattheyimplyacloserelationshipand centuries. Nowadays, in the United States, money used in
predictablewithinaspecifictransactionofthe acts mainly of Trestipos-division (paper
money and coins in the pockets and wallets of the
central bank and public); it demands deposits (checking accounts in
the amount of money. banks that do not accrue interest); and other deposits to
the view, how to account for negotiable withdrawal orders
Theintroductorypagescontainabrief (NOW), in all deposit institutions, including
Generaldescriptionofthecharacteristicsofmoney commercial savings banks, savings and associations of
and how the loan, and credit unions travel checks additionally
StatesUnited money system works. They are included in the definition of cash acts. Since
$1 in cash and $1 in demand deposits are
illustrations in the following two freely convertible within each other and both things
sectionsdescribetwoprocesses:first,howthe slate used directly for expenses, they are money
contradictory response to deposit bank expansion I have a degree. However, I only have money in
forchangesintheMontodereserossuppliedby effective and balances sustained by public non-bank
tell them about the supply money. Deposits of the
the central bank; and second, how those reserves nosotrosTrea - south, deposit institutions, banks
they are affected by both federal reserves foreigners and official institutions, as well as
behavior and other factors Finally section cash vault in deposit institutions
offers with some of the elements to modify, in Excluded son.
less in the small running, the simple mechanical This abstract concept of money is a design
relationship between bank reserves and money deposits. named as Ml in the money stock statistics of
the Federal Reserve. broader concepts of money
(M2yM3) includeMl, as well as certain other assets
financial (such as savings and deposits)
Depository institutions and mutual fund shares
from the money market) that are relatively liquid
I believe primarily to represent investments.
they use forks instead of means of exchange.
While the funds can be displaced
equitably easily between transaction balances and
this other liquid assets, the creation of money process
takes place mainly through accounts of
transactions. In the rest of the brochure, 'money' means
Ml.
The distribution among the currency components
and it depends largely on the deposit of nicotine
public preferences. When does the depositor get paid?
 control the cash withdrawal through
unautomatic cashier machine, he or she reduces the
amount of deposits and increases the amount of currency
publicsupportedit. On the contrary, when the
people have more money than necessary, something is returned
for banks in exchange for deposits.
Timetimelot is used for a wide variety of
small transactions, the majority of the amount in
dollars from the payments of money in our economy
they are made to be controlled by electronic means

21Modern Money Mechanics

 minutes to take place. some of the titleholders spend money
transfer between deposit accounts It is more, the currency
it is relatively small part of the money values. rapidly after they get that, doing these
About 69 percent, or $623 billion, of the $898 Available funds for others. Others, however, sustain.
one billion total money bag in December 1991, money for longer periods. Obviously, when something
it was the deposit transaction forms, If money remains inactive, a greater total is needed.
How much $290 billion were demanded and $333 thousand to achieve any given volume of acts.
millions were another verifiable deposits.

What makes money valuable?

In the United States, neither paper money nor the
value deposits as merchandise. Intrinsically,
one dollar bill is just a piece of paper, deposits
simplybookentries. coinsmakecertain
intrinsic value as a metal, but generally far away
less than your face value.
So, what makes these instruments
(checks, banknotes, and coins) should be acceptable
for its nominal value in payment? of all debts and for
another monetary uses? Mainly, it is trust
what do people have in thatwill be able tochange that money for
other financial assets and for real money. goods
services when it is them choosing to do so.
Money, I like anything else, drift your
value of thatscarcityin relation to its utility.
raw materials services are more or less valuable
because there they are more or less related to them
amounts people want The usefulness of money is its
unique ability to command other goods and services
and to allow the holder to be constantly ready
to do it. The amount of money being demanded
it depends on several factors, just like the total volume of
minutes
in the economy at any given time, payment habits
from society, the amount of money that the
individuals and companies want to remain
unexpected acts, and the
result of holding profits
financial assets in the money form
quite something other assets
The control of thequantitymoney is essentialyes
its values to be conserved stable. real money
value only in conditions of what
thatwillbuy. Therefore, its value varies
inversely with the general price level. Assuming
an unqualified candidate to use,yesthe volume of money
they grow faster than the qualification which the
production of real goods and services
prices are increasingthey will riseThisit will happenwhy
there will bemoremoney that goodsy services to spend that
predominant prices. Butyes,on the other hand, the
the growth of the money supply does not keep pace with
the current production of the economy, then the
priceswill fallthe national labor force
luck, and other production facilitieswillnoser
completelyemployee, or both things.
How large should the money stock be for
to take charge of the minutes of the economies without exercising
an undue influence on the price level
It depends on how intensely money is used.
Transaction deposit balance and each bill of
dollar is part of some stable body funds
no time at all, Ready to move to other owners like
 clients!11ers. The transaction accounts (demand deposits and
Who creates money? that accrue interest, in which the payment of interest is still pending
legally prohibited) in all deposit institutions are
Changes in the monetary amount may originate subject to the reservation requirements, that is, by the Reservation
with actions of the Federal Reception System (the Federal. Therefore, institutions, not only commercial banks,
have the potential to create money.
centralbanco),instituciones de depósito
(mainly commercial banks), or the public. Without
embargo, the main control of the toe lies
in the center. Bank.
Finger of the money creation process
mainly in banks.1As
earlier identified, verifiable liabilities of Introduction 3
bankstandmoney. These passive are clients' 1

Account accounts. The increase when customers

deposit my one-day checks and when the product
Loans made by the banks are credited.
for borrowers accounts
In the absence of legal restoration requirements,
banks can build on deposits for
growing loans and investments as long as they are
keep enough currency on hand to redeem it
what do the deposit account holders want
Convertir endivisa. Estaúnicoatributo delos
bankingbusiness_eradiscovered many centuries ago
back.
It began with the goldsmiths. As first
bankers initially provided custody services,
making a profit from the storage vault
Tariff for coins deposited with them.
people were redeeming their "deposit receipts" each
time they needed gold or coins to buy
something, and physically take them to the room coins for the
seller who, to turn, would deposit them for
custody, frequently with the same banker.
Everyone soon about that.eraa lot more
easy simply to use to deposit income
directly as a means of payment These receipts, which
they met as notes, they were acceptable as
money since whoever possessed it could go to the banker
and exchange them for cash.
Then, bankers discovered that they could
make loans simply forgiveness your
promises to pay, the Bank notes, to the borrowers.
In this way, banks began to create money.
More notes could be emitted than gold and currency in
hand because only part of the notes
outstanding would appear for payment in
any moment. Enough cash money
had to be kept in hand, course, for
to redeem it, what volume of notes was presented by
payment
Transaction deposits are the way forward
counterpart of banknotesExpect a small step
from printing notes to make in glibro entries
crediting deposits of borrowers, which
lenders could 'spend' by writing
checks, therefore, "printing" their own
money.

1 Request to describe the money creation process as

simply as possible, the term 'Bank' used in this brochure
should be understood to encompass all deposit institutions
which depository Institutions Deregulation of Monetary Control
To actsince 1980, the depositary institution must have a open tax identification number
paraoferta with transaction interest accounts for certainty

21Modern Money Mechanics

What limits the number of money banks reserve bank and can obtain currency
cancreate? using your reserve balance. Because any of the
It can be used to support a volume of deposit.
Side deposit dinner is then created passive banks, currency in circulation and reserve balances
easily, what is it to prevent banks from doing together they often refer to red as 'high'
also much more than enough - enough for money power base monetary reserves
keep the productive resources of the nation cash vaults in banks, however, are without
completely the employees without price inflation? count as part of the money values held by them
Like its predecessor, the modern bank must maintain public.
available, to make the payment on sight,
considerable Montodedivisayfondosen deposit with
central bank. Toe bank of the observer
Prepared to convert and deposit money within currency
depositing borrowers who request currency. Must do
check giro written by depositors and presented by
Payment for other banks (resolve clear adversities).
Finally, it should
legally maintain required reservations in the forms
cash balance and/or balances in your Reserve Bank
Federal, equal to a prescribed percentage of your deposits.
Public toe demands to divide very much,
but in general it follows a seasonal pattern that is quite
predictable. Toe effects in bank funds of these
variations in the amount of foreign currency held by the public
they are generally compensated by the central bank, which
replace the reservations absorbed by cash withdrawals
from banks. Expel how this is will to make
then explained.) For all banks taken together, there is no
net of fund management through clear control girado
in a bank normallyifwill deposit into the credit of
another account, if not in the same bank, then in some
otrobanco
These operational needs influence the
minimum amount of individual bank reserves
willvoluntarily support. However,
as long as this minimum amount is lower than the
legally required, operating standard needs
relatively minor importance as a restriction in
add depositExpansion of the banking system. Such
expansion cannot continue beyond the point where
the amount of reserves that all banks have is only
sufficient to meet legal requirements_under our
fractional reserve system. For example,yeshimself
they would require a 20 percent reservation, the deposits
they could only expand until they were
five times as big as reserves Reservations of $10
million could support deposits of $50 million in lions
Toe with the lowest percentage requirement, higher
It will be the expansion deposit that will be supported by each
additional dollar reserves. Therefore, the legal reserve
Together with the dollar amount of Bank reserves
The factors are in that group the upper limit for
money creation.

Whatthey are the reservationsbanking?

The currency kept in the vaults of the
banks can be counted as legal reserves as good
co-deposits (reserve balances) in the Banks of the
Federal Reserve. Both are equally acceptable.
to meet the booking requirements. A bank
You can always obtain reserve balances by sending currency.
Introduction 1 5
 requirements time other part May is required clear balance in
For individual banks, reserve accounts as well What credit earnings are generated to pay for Federal Reception
attend to work balances. Banks can 2 Bank services.
increase the balances in their accounts by
deposit and check transactions and transfer receipts
fund electronic forms, as well as currency. Or they
I can draw work these balances by writing checks.
in them or authorizing a debit in payment of
currency, clients' checks, other fund transfers
Although reserve accounts are used as
work balances, each bank must maintain, in the
average by the relevant reserve maintenance
período, reservasaldosen elreservaBancoybóveda
cash money which amounts are equal to what is required
reserves, as determined by the amount of your
deposits in the reserve calculation period.

Where do bank reserves come from?

The increases or decreases in the reserves
banking issues can arise from a series of factors that
they are analyzed further on in this brochure. However,
from the perspective of money creation, the
the essential point is that bank reserves are,
mostly, part, passive of the Federal Reserve
Banks and net changes in them are largely present
determined by the behavior of the System of the
Federal Reserve. Thus, the Federal Reserve, through
the capacity to vary both things the total volume
of reserves and the required reserve ratio to deposits
liabilities, influences of banks' decisions regarding
your assets and deposits. One of the important
responsibilities of the Federal Reserve System
approval of the total amount of consistent reserves
with the monetary needs of the economy to
reasonably stable prices. Such
behavior to take into consideration - action, of
course, no changes in the rhythm in which one is
using money and changes in demands of
public cash balances
The toe reader must take into account that
the deposits and reserves tend to expand
simultaneously and that the Federal Reserve controls with
frequency exercised through the market as
individualbanks: find or look for any more
more expensive to obtain your requirements
reserves, dependent on the Fed's willingness to
support the current credit and deposit rate expansion.
While an individual bank can obtain
reservations making an offer they were from another
banks, this can be done by the system
banking as a whole. Except for the reserves
temporarily borrowed from the discount window of
the Federal Reserve, as shown later,
reservation offer in the banking system is reviewed by
Federal Reserve.
Furthermore, granted the increase in bank reserves...
necessarily accompanied by an expansion in money
theoretical potential equality established in the
required reserve ratio for deposits. What
it happens for the amount of

2 Part of an individual bank's deposit account may

represent your used deposit balance to meet your review

4 1 Modern Money Mechanics

the moneywill varydepending on the reactions of the
public banks. The number of landslides may
occur. WhatMontode investigateswillexhausted
What are the currency holdings of the public? Inwhat
the increase in total reserves will remain
without using as excess reserves? How much willpower
absorbed by deposits or isotropically defined
nightstand but in contractual banks it may also remain
Do you have to keep reserves? How sensitive are they?
banks to the monetary policy actions of the central bank? The
importance of these questionswe will discuss more
forward in this brochure. Responses from Toeindicarpor
what changes in the supply money may be different
of the expected or can only respond to the action
considerable time has passed after the policy
In the following pages, the effects of various
transfer actions amount of money is written and
ilus - treaty _ The basic work tool of Toe
it is the 'T' account, which provides a simple medium of
tracking, step by step, the effects of these actions on both
things, the activity and responsibility sides of the balances
banking. Changes in the articles of assets are
they enter in the middle left of theT''changes in
passive in the middle right. For no one.
transaction, of course, there must be fewer than two entries
in request forto maintainthe equality of assets and liabilities.

Introduction 1 5
 Bank Deposits - How They Expanded
Contract

Let us assume that expansion in money buy us Government values.

desired values by the Federal Reception to achieve mayor of the toe expansion process
subpolitical object - tivos _ UnamaneraloscentralBank cannot start with the BankA, dependent on what
latainiciadotalunexpandir - sessions through purchases the distributor does it with the money received from the
of securities in the open market The payment of the securities discount of values.Yesthe distributor me - Daily
it is added to bank reserves. such purchases (and write checks for $10,000 and all of them are
Sales) are called "open market operations". deposited in other banks, BancoApier loses both things
How to open a market to add purchases for deposits and revive shows do not change like
Reserve and deposit bank? Let's suppose that the result of the open market purchase system. Without
Federal Reserve System, through its desk of embargo, other banks have received them. More likely, a
negotiation at the Federal Reserve Bank of New part of the initial depositwill remainin the BankA
york, purchases $10,000 from the Treasury invoices from and apartifwill transfer to other banks such as
distributors clear checks distributor.
values of the U.S. government In today's
3
world of
computerized financial transactions, the Federal
Reserve Bank
pay for the values with an "electronic" control
drawn in itself.4Transfer it via 'Fedwire'
red, the Federal Investigation notifies the distributor
designated Bank (Bancoa) that pays for the values
they should be credited for (deposited in) the
distributor account in Bank A at the same time
Bitcoin account review in Federal Reception
The amount for the purchase of securities is paid.
ToeFederalReceptionSystemhasaggregated
$10,000 in security ties for your assets, which that
paid by, in effect, bycreatinga
responsibility in the bank form
check balances
These reserves in the Bank's books correspond to
with
$10,000 from the non-existent distributor's deposits
before.
See illustrationl.

How does the multiple expansion process work?

Ifthe process ended here, there would be no
multiple expansion, that is, deposits and deposits
bank transactions would have changed for the same amount without

embargo, necessary banks to maintain

investigate just a fraction of them
deposits. Reserve in excess of this amount larger
used for increasing winning assets - loans and
investments.
Not used excessive investigates win not interesting Low
current regulations, I will review the requirement in contramás
transaction - commission accounts is 10 percent 5

Assuming, for simplicity, a uniform 10 percent

Review requirement in transaction contract
deposits, and assuming that all banks try to
to remain completely inverted, we are now
rattle process of expansion deposits cuallata
take it to the places of the reservationsadditional
provided by theFederal Reserve System
61Modern Money Mechanics
 I really care where it is.
money is essential at any time. The important thing is done
ishthese deposits make us disappearThey
there's nothing to deposit in the accounts at all times. Everyone
bankstogetherhave$10,000in depositsandreviews that
they didn't have before. However, they are not mandatory for
maintain $10,000 of research against $10,000
deposits. Everything they need to retain, under
A 10 percent reservation requirement is $1,000. Finger
from the outstanding $9,000
excess reserves. This amount can be lent.
or inverted.
See illustration 2.
Yesactive business, the banks with excess
probably reviewsthey will haveopportunities to provide
the $9,000. Of course, they make us really
payoff loans from the money they receive
as deposits.Yesthey did this, there is no money
additional. would be created. What would they do When they
bad loans to accept promissory notes
exchange for credits to transaction accounts
of the borrowers. Loans (assets) and deposits
(passive) both things increase by $9,000. Reserves no
they have changed for the loan minutes. But the deposit
The credits constitute new additions to the total of
banking system deposits.See illustration 3.

3 Theamountsin dollars used in the various illustrations do not have

necessarily no resemblance to real transactions. By
for example, open market operations are usually conducted at
cable with many merchants and amounts that total several billion.
of dollars.
In fact, many transactions today are conducted through
from an electronic funds transfer between accounts instead of
through the issuance of a paper check. In addition to the moment of the
accounting, the accounting entries are the same whether the
transfer is made with a paper check or electronically. The
the term "check" is therefore used for both types of
transfers
5
For each Bank, the reserve requirement is 3 percent in a
specified base amount of transaction accounts and 10 percent in
the Amount above this base Initially, the Control Law
Monetary established this base amount - called the 'reserve tranche
decreased by $25 million, and ordered thatwill changeannuallyinline
with growthinnational deposit transaction. the reserve
The decrease section was $41.1 million in 1991 and $42.2 million in 1992. The Law
Garn -St Germain in 1982 further modified these requirements.
excluding the first $2 million of reservable liabilities from reserves
requirements . _ like the low reserve segment, the exempt level! is
balanced each yearareflects the growth in passive reservable.
exemption level was $3.4 millionin1991 $3.6 million in 1992.

Deposit & Expansion and Contraction1 7

 1 Deposit and payment
1 When the Federal Reserve Bank purchases government securities, bank reserves increase. This happens
because the seller of the securities receives payment through a credittoa designated deposit account
data bank (Bank A) which the Federal Reserve affects by crediting the reserve account of Bank A

FEDERAL RESERVE BANK BANK A

Assets Liabilities Assets Liabilities

U.S. government Reserve accounts: Reserves with Customer
securities + 10,000 Bank A + 10,000....F.R. Banks + 10,000 deposit + 10,000

The customer deposit at BankAlikely will be transferred, in part, to other banks and quickly loses its identity amid the huge.
interbank flow of deposits.

2 Asa result,allbanks taken together now have

excess reserves on which deposit expansion
Totalreservesgainedfromnew deposits.....................
less: Required against new deposits
10,000

can take place. (at10percent)............................................... 1,000

equals: Excess reserves................................................ 9,000

& pension-stage
1

3 Expansion takes place only if the banks that hold

these excess reserves (Stage 1 banks) increase
STAGE I BANKS

their loans or investments. Loans are made by Assets Liabilities

crediting the borrower's deposit account, i.e., Loans +9,000 Borrower
by creating additional deposit money. deposits + 9,000

61Modern Money Mechanics

 These are the beginning of the expansion deposits. total expansion cost that will take place
proceso. Inthe first scenario of the process, total illustrate on page 11.Taken through the theoretical limits, the
Loans and deposits of the bank increased by a Initial $10,000 in reserves distributed within the bank
Amount equal to the excess of existing reserves before system for an expansion of $90,000 in
that any loan would be made (90 percent of the Bancocrédito loans and investments and support to total
increase of the initial deposit). At the end of Stage 1, $100,000 decreased deposits under 10 percent reserve
the deposits have totaled $19,000 (the requirement _ I will deposit expansion factor periodically
initial $10,000 provided by the Federal Reserve
action more the $9,000 in deposits created by Scenario
1banks).Verilustration4.However, only $900
(10 percent of $9,000) in excess reserves to have
state absorbed by additional deposit growth
inScenario1banks.See illustration5.
the loan banks, however, make us assume
To stop the deposits they create through their
loan operations.
borrowerswritecheckswhichprobablywill
deposited in other banks.Asthese checks
move through the collection process, the Banks of
the Federal Reserve debits the reserve accounts of the
pay banks (Scenario1banks) and give credit to those
the bank reception.See illustration 6.
If Scenario 1 banks really make you lose
deposits inothersbanks or if any or all of them
borrowers' checks are re-deposited in
thesesamebanks make no difference in them
expansion process.H the loans the banksthey wait
lose these deposits - and an equal amount of
reservations- how the borrowers checks are paid,
theywillnot lend more than your successors' reserves
Lkelosoriginal
$10,000 deposit, the loan created deposits May
transferred to other banks, but they
remain somewhere in the banking system
banks that receive them also acquire equally
reserve amounts, of which 10 percent
willexcess.
Assuming that the banks had the $9,000
deposits created in Scenario 1 in spinning make
loans equal for his excess reserves, then
loans and depositswill increaseanother $8,100
in the second stage of expansion. This process
Continue until deposits have been resurrected for the
point where all the reserves provided by the initial
buy the government values for the Federal Reserve
Sufficient self-sufficient system to meet reserve
requirements for newly created control deposits.(See
pages 10 and 11.
the individual Bank, process, is not worried in
how many stages of expansion there may be
participatory. Inflows and outflows of deposits occur
continuously. Any deposit received is new
money, regardless of its last source. Butyes
la política del banco es hacer préstamos e inversiones
equal to the reserves that exceed the requirements
legal, the expansion processwillto be transported
en.

How muchthey canto expand the deposits?

inthe Banking System?
Deposit Expansion Anti Contraction1 9
 the number of new bookings is then the reciprocal
of the required reserve percentage (1/.10=10). The
expansion of the loanhis sermenosporlosMontode
the initial injection. the multiple expansion is possible
because banks like a group
I like a big bank where checks are accepted.
drawn against the borrowers' deposits result
credit for accounts of other depositors, with
do not change total reservations

Expansion through InvestmentsBanking

The expansion of deposits may come from
of investments as well as loans Assume
which demand for loans in something Scenario 1
These banks would be weak later.
probably buy values.H the sellers of the
the values were clients, the banks would make payments for
accreditation_customers' transaction accounts; deposit
liabilities would increase just likeyesthey would have
made loans. It is most likely that these banks
they would purchase the values through intermediaries, payment
they should check them in their own reserve
checks would be deposited in
the bank sellers.Inany case, the
the net effects on the banking system are identical to
those resulting from loan operations.

81Modern Money Mechanics

4 Asa result of the process so far, total assets and
total liabilities ofallBanks together have risen
ALLBANKS

19,000. Assets Liabilities

Reserves with Deposits:
FR Banks + 10,000 initial + 10,000
Loans + 9,000 Stage 1 + 9,000
Total + 19,000 Total + 19,000

5 Excess reserves have been reduced by the

amount required against the deposits created
Total reserves gained frominitial deposits10,000
less: Requiredagainstinitial deposits1,000
by the loans made instagel. RequiredagainstStage I deposits............900 ........1,900
equals: Excessreserves..............................................................8,100

I have these banks to have growing...

loans and bears When they are still
having excessive servers?

6 ... because borrowers write checks on their

accounts at the lending banks.Asthese checks
STAGE I BANKS

are deposited in the payees' banks and cleared, Assets Liabilities

the deposits created by Stage 1 loans and an Reserves with Borrower
equal amount of reserves may be transferred F.R. Banks - 9,000 deposits 9,000
to other banks.

FEDERAL RESERVE BANK OTHER BANKS

Assets Liabilities Assets Liabilities

Reserve accounts: Reserves with Deposits + 9,000
Stage I banks 9,000 F.R.Banks
+ 9,000
Other banks + 9,000

Deposit expansion finished

start!

Deposit Expansion Anti-Contraction1 9

 7 Expansion continues as the banks that have
excess reserves increase their loans by that
STAGE 2 BANKS

amount, credit to borrowers' deposit accounts Assets Liabilities

in the process, thus creating still more money. Loans + 8,100 Borrower
deposits + 8,100

8 Now the banking system's assets and liabilities

have risen by 27,100. ALL BANKS

Assets Passive
Reservations with Deposit
FR Banks +10,000 s: +10,000
Loans: Stage + 9,000
Stage 1 + 9,000 Initial2
Stage + 8,100
Stage 2 + 8,100 1
Total +27,100 Total +27,100

Total reservesgained frominitial deposits ...........................10,000

9 But there are still 7,290 of excess receives in the
banking system. less: Required against initial deposits ............1,000
less: Required against Stage I deposits........... 900
less: Required against Stage 2 deposits............81O......1.Z!Q

¡
equalsExcess reserves...................................................... 7 ).90
to
Stage 3
banks

10 Asborrowers make payments, these reserveswillbefurther dispersed, and the process can continue through
many more stages, in progressively smaller increments, until the entire 10,000 of receives have been absorbed
by deposit growth.AsIt is apparent from the summary table on page 11 that more than two thirds of the deposit
expansion potential is reached after the first ten stages.

That should be understood that the stages or expansion occur neither of the two.
simultaneously nor in the sequence described above. Some banks use their
reservation is completely or only one/ have a considerable hourdelaytimeothers
expand assets in the base/anticipated growth.
The process is, offactit continues and may never reach its theoretical limits.

101Modern Molecule Mechanics

 Thus through stage after stage of expansion,
Money can grow to a total of 10 times the new
reserves supplied to the banking system...

Assets Liabilities
Reserves
Loans and
Total [Required] Excess Investments Deposits
Initialreservesprovided l0,000 1,000 9,000 10,000
ón-Stage 1 ..................
Expansion 10,000 1,900 8,/ 00 9,000 19,000
Stage 2............... 10,000 2,710 7,290 17,100 27,100
Stage 3............... 10,000 3,439 6,561 24,390 34,390
Stage 4............... 10,000 4,095 5,905 30,951 40,951
Stage 5.................. 10,000 4,686 5,314 36,856 46,856
Stage 6.................. 10,000 5,217 4,783 42,170 52,170
Stage 7.................. 10,000 5,695 4,305 46,953 56,953
Stage 8.................. 10,000 6,126 3,874 51,258 61,258
Stage 9.................. 10,000 6,513 3,487 55,132 65,132
Stage 10................... 10,000 6,862 3,138 58,619 68,619

Stage 20 ................... 10,000 8,906 1,094 79,058 89,058

Final stage ................ 10,000 10,000 o 90.000 100,000

...asthenewdepositscreatedbyloans
Each stage is added to those created at all.
earlier stages and those supplied by the initial
reserve-creatingaction.

100,000

Cumulative expansion in deposits on

basis of 10,000 of new reserves and
reserve requirements of 1 percent 80.000

60,000

40,000

20,000

o
Initial 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 final
deposits Expansion stages

Deposit Expansion and Contraction 11

 insufficient, in turn, compensates for this deficiency by selling
salesin the open market they reduce the reserves and
values or reducing loans, a greater occurrence happens
bank deposits
contraction of deposits.
Now let's suppose that some reduction is desired.
in the amount of money. Normally this would reflect Thus, the contraction proceeds through reductions in
temporal or seasonal reductions in activity to be deposits and loans or investments in one stage after another.
funded since, year after year, an economy in or until total deposits have been reduced to the point
growth needs at least some expansion
monetary. Just government purchases - values of
by the Federal Reserve System can
provide the basis for deposit expansion for
adding for Bank
reservations, the sales of securities by the System of the
Federal Reserve reduces the money supply by absorbing the
bank reserves. The toe process is
essentially the reversal of the steps of expansion that are
they have just described.

Suppose that the Federal Reserve System sells

$10,000 in Treasury notes to a stockbroker of
U.S. government and receives a check as payment.
electronic turned against BankA.Whenif
make this payment, the reservation account of Bank A in
The Federal Reserve Bank is reduced by $10,000.How a
result
the securities holdings of the Federal Reserve System
and the reserve accounts of banks are reduced by
$10,000. Dedo del pie $10,000 reducción en Banco ns
consistent passive deposit - your decrease in the
money values.Verilustration 11

Contraction is also a cumulative process.

Although Bank A may have recovered part
from the initial reduction of deposits from other banks
as a result of interbank deposit: flows, all
banks taken together have $10,000 less in deposits and
reserves of what they had before the securities sales of
the Federal Reserve. The amount of reserves released
due to the drop in deposits, however, it is only
$1,000 (10 percent of $10,000). Unless the
banks that lose reserves and deposits have excess
reserves, there is a deficiency of $9,000 with the reservation.See
illustration 12.Although they can borrow from the
Federal Reserve banks to cover this deficiency
temporarily, sooner or later the bankstender án
to obtain the necessary reserves in some other way
to reduce their needs for reserves.
One way for a bank to obtain reserves
what it needs is through the sale of securities. But, as
the buyers of the securities pay for them with funds in
your deposit accounts in the same or other banks, the
net income is a decrease of $9,000 in the
values. and deposits in all banks.See illustration 13
To theend of Stage 1 of the contraction process, the
deposits have a reduced status for a total of $19,000 (the
initial $10,000 resulting from the Federal Reserve
action plus the $9,000 in deposits extinguished by sale
of bank values Stage 1).See illustration 14
However, there is now a reserve deficiency
of $8,100 in the banks whose depositors withdrew their
accounts to buy the values of the banks of the Stage
1. Asthe new group of banks with reserves
121Modern Money Mechanics
where the lowest volume of reserves is suitable for
supply them. The multiple of toe contraction is
the same that applies in the case of expansion. Under a
10 percent reservation requirement, a reduction of
$10,000 in reserves would ultimately imply
reductions of $100,000 in deposits and
$90,000 in loans and investments.
Howin the case of the expansion of deposits,
the contraction of bank deposits may occur
as a result of sales of securities or reductions of
loans. While some would undoubtedly be made
adjustments of both types, the initial impact is likely
It would be reflected in the sales of public bonds. The majority
pending types of loans cannot be demanded
for payment before their due dates. But the
the bank may stop granting new loans or
refusing to renew the earrings to replace those that
are currently expiring. Therefore, the deposits
accumulated by the borrowers in order to settle the
loans would be extinguished as the loans
were canceled. refunded
There is an important difference between the expansion -
processes of extension and contraction. When the System of the
Federal Reserve increases bank reserves, the
expansion of credit and depositscanto take place
up to the limits allowed by the minimum index of
reserves that banks are required to maintain.
But when the System acts to reduce the amount of the
bank reservesshoulda contraction of the
credit and deposits (except to the extent that)
use the existing reserve excesses and/or the
cash surpluses in cash) up to the point where
the required relationship between reservations is restored
deposits. But the meaning of this difference should be
not be oversized. Due to the balances of
excess reserves do not earn interest, there is a strong
incentive to convert them into profitable assets
(loans and investments).

Deposit & Expansion and Contraction 113

 1 Deposit contraction
11 When the Federal Reserve Bank sells government securities, bank reserves decline. This happens because the buyer
of the securities makes payment through a debit to a designated deposit account at a bank (BankNwith the transfer of
funds being affected by a debit to Bank N's reserve account at the Federal Reserve Bank.

FEDERAL RESERVE BANK BANK A

Assets Liabilities Assets Liabilities

U.S. government Reserve accounts: Reserveswith Customer
securities - 10,000 Bank A - 10,000 .,.._.F.R.Banks- 10,000 deposit - 10,000

This reduction in the customer deposit at Bank A may be spread among a number of banks through interbank deposit flows.

12 Toe loss of reserves means thatallbanks taken

together now have a reserve deficiency.
Totalreserves lostfrom deposit withdrawal10,000
Reserves freedbydeposit decline
(at I O percent)······················.. ····························· 1,000
equalsDeficiency in reserves againstmaInIngdeposits. 9,000

Contraction-Stage 1

13 Toe banks with the reserve deficiencies (Stage 1

banks) can sell government securities to acquire
STAGE I BANKS
'
reserves, but this causes a decline in the deposits Assets Liabilities
and reserves of the buyers' banks. U.S. government
securities -9,000
Reserves with
F.R. Banks + 9,000

FEDERAL RESERVE BANK OTHER BANKS

----------.-----------
Assets Liabilities Assets Liabilities
Reserve accounts: Reserves with Deposits -9,000
Stage I banks+ 9,000 Banks - 9,000
Other banks 9,000

14 Asa result of the process so far, assets and total

deposits ofallbanks together have declined 19,000.
ALLBANKS

Stage 1 contraction has freed 900 of reserves, but Assets Liabilities

there is still a reserve deficiency of 8,100. Reserves with Deposits:
F.R. Banks 10,000 Initial 10,000
U.S. government Stage 1 - 9,000
securities - 9,000
Total - 19,000 Total 19,000

A greater place must take place

contraction!

121Modern Money Mechanics

 Bank reserves: how
they change

automatic increase of the Federal Reserve credit in

Money has been defined as the sum of accounts.
of transactions in deposit institutions, and the form of "floating". Other influences, such as changes
currency and trav - Senior checks in the hands of in the currency holdings of the public, they may persist.
public. Money is something that almost everyone uses for a longer time. periods of time.
every day. Therefore, when most people Still other variations in Banco Reservas result
think about money,thinkin currency. opposite _ Sin only from the institutional mechanical preparations
embargo, according to this popular impression, thedeposits of entre laTesorería, los FederalreservaBancos,ylos
transactionsthey are the most significant part of the stock of depository _institutions ToeTreasury, for
money. People have enough cash on hand to example, keep part of its operating cash balance
affect the small face. in bank deposits. But virtually all
face-to-face transactions, but they write checks for disbursements are made from its balance
cover most of the big expenses. Most of the
companies probably have amounts of money in
cash even smaller in relation to their
total transactions that people.
Given that the most important component of money
they are the transaction deposits, and since these
deposits must be backed by reserves, the
the influence of the central bank over money depends on its
control over the total number of bookings and the
conditions under which banks can obtain them.
The previous illustrations of the processes of
expansión y contracción han demostrado cómo el banco
central, through the buying and selling of public securities,
it can changedeliberately the bank reserves
added to affect the deposits. But the operations
open market are just one of several types of
transactions or developments that cause changes in the
reservations. Some changes originate from actions
from the public, from the Department of the Treasury, from the banks
or foreign and international entities. institute -
Other changes arise from the functions of
service and operational needs of the banks themselves
of Reservation.

On the opposite page, several factors are listed.

that provide and absorb balances of bank reserves,
together with symbols that indicate the effects of these
developments. This tabulation also indicates the nature
from the balancing seats in the books of the Reserve
Federal. (As long as the impact is absorbed
for the changes in the cash of the vaults of the
banks, the Federal Reserve's books will not include
affected).

Independent factors versus political action

It is evident that bank reserves are affected
affected in sev - general forms that are
independent from the control of the central bank. Most
these 'independent' elements are changing more
more or less continuously. Sometimes, their effects can last
only one or two days before it automatically reverts.
This happens, for example, when bad weather slows down.
the check collection process, which leads to a
Factors Affecting Bank Reserves 15
 the Reserve Banks. As will be shown later,
any accumulation in balance The transactions in the
Reserve banks before Treasury expenses
they cause a dollar-for-dollar drain of the reserves
banking.
Incontrast for these independent elements
what affects the reserves are the policy actions
taken by the Federal Reserve System. Toe
method open system market purchases and sales of
values affect the reserves, as has been described.In
addition, there are two other forms in which the system is
affectBank reserves and potential deposit volume
directly: first, through loans for
depository institutions; and secondly, through changes
in the percentages of legal reserve. To change in the
required reservation proportion, supposedly, does not alter
directly the volume of reserves in dollars, but yes
change the deposit amount given amount of
reservations can support

Any changes to the reservations,

regardless of its origin, it has the same
potential to affect the deposits. Therefore, for
achieve net reserve effects consistent with its
monetary policy objectives, the Federal Reserve System
continuously must take into account what the factors
independents are making the reservations and then,
using your policy tools, compensate them or
supplement them as the situation requires. demand.
By far, the largest amount and the highest number
of gross open market transactions of the System
are carried out to compensate for drains or additions to
bank reserves from sources outside the Reserve
Federal which, otherwise, could cause changes
abrupt changes in credit availability.Additionally, the
purchases and/or sales of Federal Reserve securities are
they are made to provide the necessary reservations for
back the growth rate of money according to
with monetary policy. objectives
Inthis section of the brochure describes in detail
various types of transactions that can be important
weekly effects on bank reserves. Others
factors that normally have a small influence
They are briefly described on page 35.

141Modern Money Mechanics

1 Factors that modify reserve balances: actions
independents and politics
Feli > Eul.! Reserve the bank.

Assets Liabilities

Other
Public actions
Increase in foreign currency holdings +
Decrease in foreign currency holdings

Estate, banking, and foreign shares

Increase in Treasury deposits in FR Banks.......................................... +
Decrease in Treasury deposits in FR Banks .............................................
Gold purchases (influx) or increase in official valuation*...................
Gold sales (outgoing)* +
increase issued certificates
Decrease in certified SDR issued* .................................................... .... +
Increase in the circulating Treasury currency* ..........................................
Decrease in Treasury outstanding foreign currency*........................................ +
Increase in Treasury cash money values in portfolio* +
Decrease in Treasury cash holdings* .................................. ..........
increase related to the service balances/adjustments +
Decrease in balances/adjustments related to the service ...............................
increase in foreign and other deposits in FR Banks .......................... +
Decrease in foreign currency deposits and others in FR Banks .........................

Federal Reserve Actions

Securities purchases +
Soles devalues
Bribery parade depositary institutions+
Refundofloans to deposit institutions...............................
Increase in the Federal Reserve float +
Decrease of the Federal Reserve's float
increase in foreign currency denominated assets.......................... +
Decrease of assets denominated in foreign currency.
increase in other assets +
Decrease in other assets
increase enotropasivo +
Decrease in other liabilities
increase in capital accounts +
Decrease in capital accounts

increaseinreservation requirements
ocreosaen reservation requirements

These factors represent assets and liabilities of the Treasury. Changes in them generally affect reserve balances.
through a related change in the liability 'Treasury' of the Federal Reserve Banks. deposits.
** Included in 'Other accounts of the Federal Reserve' as described on page 35.
*** Effect on excess reserves. Total reserves remain unchanged.
Note: As long as reservation changes are made in a secure manner, the accounts of the Federal Reserve are not affected.
affected.

Factors Affecting Bank Reserves 15

 Changes in the quantity of Currency held by the public
moneyWasSupportedByThePublic weekly averages,billions of dollars, not seasonally adjusted

280.-------------------
Changes in the amount of currency in possession of
the public typically will follow equitably regular 260
intramonth pattern _Importantchangesalsotakeplace
about party periods during the Christmas shopping
season-timesWhenpeoplemeet 240
It's convenient to have more pocket money on hand.
graph.)Toe publicly acquires currency from
220
banks for check collection When 6
deposits, which
they are fractional restore money, they are
exchange by currency, which 100 percent of
Feb. Apr. June Aug. October. Dec.
money reset, the banking system experiences a
net drainage reset. Under the assumed requirement of
10 percent reset, BankAmountAdded
reset support deposits ten times like
probably will have changed hands, and it will be deposited
great, but when drawn to satisfy the
by operators of motels, gasoline stations, restaurants, and
demand for foreign currency, the exchange is one to one. A$1
retail stores. This process is exactly the reverse of the
in fold in currency uses above$1 resets _
currency drain, except that the banks to which currency
SuponeraBancoclientecobradoa$100 is returned may not be the same banks that paid it out
control to obtain the necessary currency for some But in the aggregate, the banksgainresetves as 100
weekend holidays. Bank deposits percent reset ve money is converted back into fractional
reduction $100 because the customer pays for the reset money.
money with control in Bisosutransaction When $100 of currency is returned to the banks,
deposit; and the currency banks (money vault in Deposits and vault cash are increased. See illustration 17.
cash resets) is also reduced by $100. See Banks can keep the currency as vault cash, which also
illustration 15. counts as reserves. More likely, the currency will be.
Save us less currency. This is May. shipped to the Reserve Banks. The Reserve Banks credit
replenish cash sub-authorization by ordering bank reserves accounts and reduce Federal Reserve note
Divide by Federal Reestablish _Bank: perform liabilities. See illustration 18. Since only $10 must be held
the payment by the authorization of a charge against the new $100 in deposits, $90 is excess reserves
restore account In the Reset Bank books, and can give rise to $900 of additional deposits. 7
Charge against the banks to restore accounts To avoid multiple contraction or expansion of deposit
compensate for an increase in responsibility money merely because the public wishes to change the
FederalReestablishNotes. See illustration sixteen. composition of its money holdings, the effects of changes
Toe Reset Bank send for the bank in the public's currency holdings on bank reserves nor-
could consist, in part, of us Mally are offset by system open market operations.
coins quite that
Federal Restore notes All currencies, as well
as a small amount of paper money still in
circulation but is no longer issued, they are obligations
from the Treasury. As far as remittances go
cash for banks is in the currency form,
compensation entry in the Restore Banks
book decrease of asset encumbrance
currency.
6The same balance sheet entries apply whether the individual physically
Toe public now put them down caches a paper check or obtains currency by withdrawing cash through an
money volume like before, except that there is more automatic teller machine
in the form of currency and less is in the form of 7Under current reserve accounting regulations, vault cash reserves are

transaction deposits. Under a reset requirement used to satisfy reserve requirements in a future maintenance period while
reserve balances satisfy requirements in the current period.Asaresult
of 10 percent, the number of restarts required the impact on a bank's current reserve position may differ from that shown
In contrast, the $100 deposits will only be $10. unless the bank restores its vault cash position in the current period via
changes in its reserve balance.
full time $100 restore state
exhausted due to the disbursement of $100 in currency.
Therefore, bank silos obtained without excess
Restorations, the $100 cash withdrawal causes ...
restart deficiency of $90 unless new
restore they provided from something another source,
BankMoney
161Modern assetsMechanics
and deposits must be reduced.
(according to the contraction process described in
pages 12 and 13) for an additional $900.Inthat moment,
the restored deficiency caused by the withdrawal of
effective would be eliminated

When the coin returnsto thebanks, increase reserves

After party periods, I will see returns for the banks.
The customer who cashed a check to cover expenses
advance cash can be redeposited later
any currency that still has it is beyond
normal pocket money needs. More than that

117
Factors Affecting Bank Reserves
 15 When a depositor cashes a check, both
deposits and vault cash reserves decline.
BANK

Assets Liabilities
Vault cash Deposits -100
reserves -100
Required -to7
LDeficit 90J

Ifthe bank replenishes its vault cash, its account at the Reserve Bank is drawn down in exchange for notes
16 issued by the Federal Reserve.

FEDERAL RESERVE BANK BANK

Assets Liabilities Assets Liabilities

Reserve accounts: Vault cash +100
BankA - 1OO Reserves with
F.R. notes +100 4F.R.Banks -100

17 When currency comes back to the banks, both

deposits and vault cash reserves rise.
BANK

Assets Liabilities
Vault cash Deposits +100
reserves +100
{Required +107
LExcess +9'!.J

18 If the currency is returnedtothe Federal Reserve, reserve accounts are credited and Federal Reserve
notes are taken out of circulation.

FEDERAL RESERVE BANK BANK

Assets Liabilities Assets Liabilities

Reserve accounts: Vault cash -100
BankA + 1OO Reserves with
F.R. notes 100 4F.R.Banks +100

181Modern Money Mechanics

Treasury deposits of the U.S. Operating cash balance of the U.S. Treasury
Federal Reserve Banks weekly averages, billions of dollars, not seasonally adjusted

I
deposit account reserve institutions 60 -----------------
TT&L note balances
consistent - safeguarding the passive deposit store Balances at Federal
Federal Reserve_System. Other institutions, however, Reserve Banks
Furthermore, keep the debts in the Federal Reserve 40
Banks - mainly the Treasury of the States
United, central foreign banks, and international
financial institutions generally, when are these 20
the reserve banks fall, and
vice versa. This happens because the funds used by
these agencies to build up your deposits in the
Central banks ultimately come from o
1990 1991
of the deposits in banks. On the contrary,
payment recipients from these agencies
normally deposit the funds in banks. Through
Collection process these banks receive credit for their Suppose a government employee deposits $1,000
reserve accounts expense check in BankA The bank sends the check to
the most important non-bank depositors its Federal Reserve Bank for collection. The Reserve Bank
Treasury of the United States. Part of the balance of then credits BankNsreserve account and charges the
the operating cash of the Treasury remains at the Treasury's account. As a result, the bank gains both re-
Federal Reserve Banks; the rest remains in serves and deposits. While there is no change in the as-
institutional deposit all about the country, in sets or total liabilities of the Reserve Banks, the funds
called promissory note accounts ofTaxesy drawn away from the Treasury's balances have been shifted
Treasury loans(IT&L).(Consult)the painting.) ed to bank reserve accounts. See illustration20.
The disbursements of the Treasury, however, are made One of the objectives of theTI&Lnote program,
against their balances at the Federal Reserve. Thus, the which requires depository institutions that want to hold
transfersfrombankstoFederalReserveBanks Treasury funds for more than one day to pay interest on
are made through regularly scheduled them, is to allow the Treasury to hold its balance at the
callsTI&Lsufficient _ Reserve Banks to the minimum consistent with current
Funds are available to cover Treasury checks. payment needs. By maintaining a fairly constant balance,
as they are presented for payment 8
large drains from or additions to bank reserves from wide
swings in the Treasury's balance that would require extention
Bank Reserves Decrease Just LikeDepósitos del Tesoro sive offsetting open market operations can be avoided.
in the Increase of Banks ReseJVe Nevertheless, there are still periods when these fluctu...
CallsTI&LDo not count to drain reserves tions have large reserve effects. In 1991, for example,
from the banks for the complete amount of the transfer week-to-week changes in Treasury deposits at the Reserve
funds transferred from the balances ofTI&L(through Banks averaged only $56 million, but ranged from -$4.15
charges to bank reserve accounts for Treasury billion to +$8.57 billion.
balance in reserve banks.
Since no reservations are required against the
accounts payablefrom IT&L,these transfers make
no reduce requires reservations 9

Suppose Treasury calls payee by Bank A 8When the Treasury's balance at the Federal Reserve rises above expected
The Federal Reserve Banks rise to $1,000. payment needs, the Treasury may place the excess funds in TI&L note
authorized to transfer the amount of the call from the Treasury accounts through a 'direct investment.' The accounting entries are the
same, but of opposite signs, as those shown when funds are transferred
from the reserve of the Bank Account in the Federal Reserve from TI&L note accounts to Treasury deposits at the Fed.
Treasury Department of the United States 9Tax payments received by institutions designated as Federal tax depositaries
Federal Reserve.howresult of the transfer ies initially are credited to reservable demand deposits due to the U.S.
government. Because such tax payments typically come from reservable
both things reservedTI&LNote balances of the bank Transaction accounts, required reserves are not materially affected on this.
they reduce. In the records of the Reserve Bank, the day. On the next business day, however, when these funds are placed either
bank reserves decrease and deposits of in a nonreservable note account or remitted to the Federal Reserve for
credit to the Treasury's balance at the Fed, required reserves decline.
Treasures increase.Verilustration 19.This retreat of
Treasury funds will cause a reserve deficiency of $
1,000 water reserves are released by the
decrease inTI&LNote accounts in depositary
institutions

Banking grows likeTreasury Deposits

in the fall of the banks ReseJVe 117
Factors Affecting Bank Reserves
 ComolosTesoreríahacegastos, chequesdibujado
Deposits in banks are paid for the
public, and these funds find their way to support you
Banks receive deposit forms.
reserve credit equal to the total amount of these
deposits, although the corresponding increase in their
required reserves are only 10 percent of this
Amount.

201ModernMoneyMechanics
19 When the Treasury builds up its deposits at the Federal Reserve through 'calls' on TI&L note balances,
Reserve accounts are reduced.

FEDERALRESERVE BANK BANK

Assets Uabilities Assets Liabilities

Reserveaccounts: Reserveswith Treasury tax and
BankA - 1,000 .,_..F.R.Banks -1,000 loan note account -1,000
U.S. Treasury /Required
deposits +1,000 Deficit
'Ἴ

20 Checks written on the Treasury's account at the Federal Reserve Bank are deposited in banks.Asthese are
collected, banks receive credit to their reserve accounts at the Federal Reserve Banks.

BANK OF THE RESERVE BANK

FEDERAL

Assets Passive Assets Passive

Accountsof reserve: Reservationswith Private deposits +1,000
BankA + 1.000 ++ FR Banks +1,000
Treasury of the States { Required +1007 _
United Lexcess+9
deposits _
1,000

Factors Affecting Bank Reserves 119

 Changes in the Federal Reserve's float Federal Reserve float (including as-of adjustments)
annual averages, billions of dollars
A large proportion of checks drawn on
bank deposited in another bank is cleared
collected through the Federal Reserve Banks. something
these checks are credit education
immediately for the reserve accounts of the banks
depositors and are charged on the same day with a debit to the
bank accounts where the checks are reserved
They draw. All checks are credited in the
accounts of deposit banks according to
the availability schedules related to
the hours are normally taken by the Federal Reserve to
collect the checks, but almost never more than two business
Days later they received it in the reserve banks.
including even if they may not yet have this state collected
overcome for processing, transport, or other delays
the credit reserve given for checks not yet collected process of collection are not reduced that day, the credit
included in Federal Reserve 'float" In the 1st books of
to Bank Are presents an addition to total bank reserves
Federal Reserve Banks, balance sheet float, or since the reserve accounts of Banks B, C, and Dwillnot
declaration _ float sometimes called, is have been commensurately reduced.12See illustration 22.
the difference between_ the active account elements
collection process and the responsibility account A Decline in Federal Reserve Float Reduces
deferred credit elements. declaration floats _ BankResel'Ves
generally positive since it happens more often Only when the checks are actually collected from
the case of wanting to reserve credit is given before the
Banks B, C, and D do the float involved in the above ex-
checks are really collected than the other
ample disappear - "items in process of collection" of the
around
Reserve Bank declines the reserve accounts of Banks B.
Published data on Federal Reserve flotillas are C and D are reduced.See illustration 23.
based on a "reserve factor" framework instead On an annual average basis, Federal Reserve float
accounting balance sheet template.According to what has been published,
declined dramatically from 1979 through 1984, in part
theFederal Reserve float includes declaration
reflectingactionstakentoimplementprovisionsofthe
floater, as defined above, I also _a s Monetary Control Act that directed the Federal Reserve to
related to the float starting from 'adjustments .___ 1 1
reduce and price float(Seechart.)Since 1984, Federal
these adjustments represent corrections for errors that
Reserve float has been fairly stable on an annual average.
increasing processing related records to basis, but often fluctuates sharply over short periods.
Federal reserve quoted services. Starting from adjustments. From the standpoint of the effect on bank reserves, the
make changes to the balances of any Federal The significant aspect of float is not that it exists but that its
reserveBankforindividual -doubleBank. Quite volume changes in a difficult-to-predict way. Float can
they are corrections for the bank positions of increase unexpectedly, for example, if weather conditions
reservation, thus affecting the calculation of whether onolosBanco
ground planes transporting check stop paying banks for
Satisfies reservation requirements collection. However, such periods typically are followed
An increase in the Federal Reserve's float byoneswhereactualcollections exceed newitemsbeing
increase bank reserves received for collection. Thus, reserves gained from float
expansion usuallyarequite temporary.
Howfloaters rise, total Bank reserves
increase by the same amount For example,
suppose BankA receives checks for the total $100
drawn in Banks B, C, and D, to 11 distant cities.
Bank increase the accounts of its depositors
$100,yenvíaloselementosparaaFederalreserva Federal Reserve float also arises from other funds transfer services
10
provided by the Fed, such as wire transfers, securities transfers, and
Bank for the collection of checks received, the automatic clearinghouse transfers.
reserve own asset account bank increases 11As-of adjustments also are used as one means of pricing float, as discussed

elements in the collection process, already increases its on page 22, and for non-float-related corrections, as discussed on page 35.
responsibility account 'deferred credit items " 12If the checks received from Bank A had been erroneously assigned a two
day deferred availability, then neither statement float! l?r reserves' Yould
(checks and other elements not yet credited for The increase although both should. Bank A's reserve position and published
send banks' account reservation.Ashow are you Federal Reserve float data are corrected for this and similar errors through
Two stories moving together, there is no change. as-of adjustments.
floaters in total reserves from this source.See
illustration 21
201Modern Money Mechanics
 In the next business day (assuming BanksB,
C,yDestánOn a day different availability points), the
ReserveBankPayBankTo the reserve Banks 'credit
deferred elements 'account is reduced, and Bancons
Reserve account increased by $100. If these elements.
Realmente tomarmásqueunanegociodíapara
then collect the elements

Factors Affecting Bank Reserves 119

 21 When a bank receives deposits in the form of checksdrawnon other banks, it can send them to the Federal
Reserve Bank for collection. (Required reserves are not affected immediately because requirements apply to
nettransaction accounts, i.e., total transaction accounts minus both cash items in process of collection and
deposits due from domestic depository institutions.

FEDERALRESERVE BANK BANK

Assets Liabilities Assets Liabilities

Items in process Deferred Cash items in Deposits +100
of collection +100 credit items +100 process
of collection +100

22 If the reserve account of the payee bank is credited before the reserve accounts of the paying banks are debited,
total reserves increase.

FEDERAL RESERVE BANK BANK

Assets Liabilities Assets Liabilities

Deferred Cash items in
credit items 100 process of
Reserve accounts: collection -100
BankA +100+-, Reserves with
4F.R.Banks +100
{Required +107
LExcess +9'!]

23 But upon actual collection of the items, accounts of the paying banks are charged, and total reserves decline.

FEDERAL RESERVE BANK BANKS BC, WHAT D

Assets Liabilities Assets Liabilities

ltems in process
of collection -100
Reserve accounts:
BankB 1
BankC 100
.rf.R. Reserves with
Banks
required -/
-100
Deposits -100

BankD Deficit 90

221Modern Money Mechanics

 "credits" which are only used to compensate the lataser
Changes in balances and adjustments charges for Federal Reserve services.14Alternatively,
banks can pay for services through a charge
related to the service directly to your reservation.accountsYesaccumulated earnings
credits are used to pay for the services, then
Ordering to promote safe and efficient payments the reserve balances are not affected. In the other hand,
system, the Federal Reserve offers banks a variety of yesfor service payments take the direct charge form
Prepayments for monetary control services stop the banks reserve account, then reserve the balances
In 1980, the Federal Reserve offered its services. decrease. See illustration 25
free, but only to the banks that were members of the
Federal Reserve System.
Toe Monetary Control directed action
The Federal Reserve offers services totodo1depository
institutions, to load for these services, and for
reduce and quote the Federal Reserve float13
Exceptofloateveryonethe services covered by the
They would have cost by the end of nineteen hundred.
eighty-two. Implementation of fixed flanger
prices essentially terminated in 1983.
Toe of the incoming Federal Reserve Carillo
services brought several changes that affect them to use
bank deposits
attend to accounts as a result, only part of the
total balances in reserve bank accounts are identified
how "reserve balances" available to gather reserve
requirements OthersaldosCelebrated inreservacuentas
related to the service balances and adjustments
(paracompenstateforfloat).
the ancestors require clear balances sustained by banks
that federal reserve service time 'adjustments'
represent ball access took for banks that pay for
float with adjustments
Aincrease in required compensation balances
Reduce the Reserve Balances
Procedures for establishing and maintaining them
compensation balances were approved by the Board of
Federal Government reservesSystem in February
1981. UnBancomayo is required to maintain clear.
balanceyesbalance reserve oryes
sure dear reserve balance (held for satisfied - fy
Reservation requirements) is not large enough
to manage your declared volumeTypically at Bank
both things hold ancestral reserves and balances of
compensation required in the same reserve account
Therefore, as required, clear balances are established.
increased, the balance of reserve accounts
identify - dismissed as reserve balances declines
AssumeBankWantsToUseFederalReserve
services, but it has a reserve balance requirement that
is less than its expected operand needs.
bankReserve, it is determined that Bank A must
maintain a required clear balance of $1,000.If Bank A
nohas excess reserve balance,will haveto obtain
funds from another source. Bank could sell
1,000 in values, but it was voluntary to reduce them.
totalBankreservebalancesanddeposits.Seeillustration24
Banks are billed every month by the Federal
Service reservation to be used with payment collected in
specific - goodbye day the following month. ANNOUNCEMENT
required clear retained balances generate profits
i
Factors Affecting Bank Reserves 21
 new services offered.
14 The profit credits are calculated by multiplying the balance of

Balances and adjustments related to the service average real compensation maintained over a period of
weekly averages, billions of d óbears, no maintenance, up to the required amount plus the balance of
compensation, based on a rate linked to the federal funds rate
seasonally balanced average. The compensation balance band is 2 percent of

5,-----------------
required compensation balance or $25,000, whichever amount is greater.

I
Adjustments to While some types of flotation have a direct price, the
15

The Federal Reserve sets the price of other types of floating indirectly,

-. . compensate the float

for example, even the cost of the float per item Rate per
the quoted service.

4 Required balance deletion

o
1989 1990 1991

floatTheclosing adjustments reduce the

reserve balances
In 1983, the Federal Reserve began to set
explicitly pricing to float,15 specifically
interterritory "control float, that is, floating
generated checks deposited by the bank served by
aReservation Bank perodibujado in Bank served by
another Reserve Bank. The depositing bank has three
options to pay interterritorial control floaters
generate the use of utility credits, authorize
a direct charge to your reservation account, or pay for them
float with an adjustment part.Yesany of them
two first options chosen, the accounting entries
they're the same as paying for other expensive services.Yes
the option of adjustment is chosen, however,
the balances of the Reserve Banks and the Bank are not
directly affected. What happens is that
part of the total balances held in the reserve
the bank account is identified as being maintained for
compensate the federal reserve for floating This part, then,
cannot be used to meet the reservation requirements
or the compensatory balance requirements. Float
price setting from adjustments are applied
Weeks later, the related floaters generated.
As such, a private bank has enough time to
obtain funds from other sources in order to avoid
no reserves of deficiencies that may result from
float price fixing starting from adjustmentsAll the sitos
banks together have excessive reserves, however, the floating
fixation of precious starting lead of adjustments for
decrease in total Bank reserve balances
Week to week changes related to the
balance service and adjustments can be volatile, reflecting
mainly adjustments to compensate for float.charl.j
Since these changes are known in advance, no
undesired impact on reserve ball ancestors
easily compensated through open market
operations.

13 The law specified that the rate programs cover services

such as check compensation and collection, wire transfer,

automated compensation camera, settlement, _ values
custody, non-cash collection, Federal Reserve float, and none

221Modern Money Mechanics

24 When Bank establishes a required clearing
balance at the Federal Reserve Bank by selling
BANK

securities, the reserve balances and deposits of Assets Liabilities

other banks decline. U.S. government
securities -1,000
Reserve account
withF.R.Banks:
Required clearing
balance +1,000

FEDERAL RESERVE BANK OTHERBANKS

Assets Liabilities Assets Liabilities

Reserve accounts: Deposits -1,000
Required clearing
balances:
BankA
Reserve balances:
Other banks

When BankA is billed monthly for Federal Reserve services used, it can pay for these services by having
25 earnings credits applied and/or by authorizing a direct charge to its reserve account Suppose Bank A has
accrued earnings credits of $100 but incurs fees of $125. Then both methods would be used. On the Federal
In the Reserve Bank's books, the liability account "earnings credits due to depository institutions" declines by $100.
and BankA's reserve account is reduced by $25. Offsetting these entries is a reduction in the Fed's (other)
asset account 'accrued service income.' On Bank A's books, the accounting entries might be a $100 reduction
tion to its asset account 'earnings credit due from Federal Reserve Banks' and a $25 reduction in its reserve
account, which are offset by a $125 decline in its liability 'accounts payable.' While an individual bank may
Using different accounting entries, the net effect on reserves is a reduction of $25, the amount of billed fees that
were paid through a direct charge to Bank A's reserve account

FEDERALRESERVE BANK BANK

Assets Passive Assets Liabilities

Income from Credits of Income credits Accounts
services -125 profits due to defeated since payable -125
accumulated the deposit
institutions -100 FR Banks -100
Reserve
BankAaccounts: • 25 +-+ Reservations
F.R. Banks with - 25

Factors Affecting Bad Reverses 1 23

 settlement.
Changes in Lnans to The bank makes payments by authorizing debit for your account.
Federal Reserve Bank. Refund of for the
Depository Institutions thus, borrowing reduces both the reserves and the
loans from the Federal Reserve BanksSee
Previous for the Monetary Control Act to act illustration
1980, only banks that were members of the Federal Unlike loans, we break down the seasonal.
reserveThe system had regular access to the 'window of extended credit programs, credit adjustment loans
"discount" from the Fed. Since then, all the for banks generally
institutions that have reservable deposits under
Acting to have a state power to borrow.
from the Fed. Under conditions place by the
Federal Reserve, standard loans available under Three
credit programs: adjustment, seasonal, and extended
credit16the average amount of a decadewritewindow
discount credit provided several overtime.(See)
When does the bank lend from the Federal
bank reserve, take on loan reservations for acquisition
Reservations in this way differ in an important way.
Since the cases have already been illustrated. Banks usually take
loan adjustment credits only to avoid
insufficient reserves or overdrafts, not to obtain
excess of reserves. The adjustment credit loans,
therefore, they are reserves whichever expansion it may have
Toma el lugar. How can this happen?
Ensures efforts to accommodate clients as well.
how to keep completely inverted, banks
frequently take out loans in advance
deposit fund asset entries from deposits or market
from dinerofuentes. Add loans for Bank
deposits but for bank reserves. Unless
excess reserves the bank should not be hit
sufficient reserves to gather the reserve requirements
contralosnuevodepósitos. Likewise, individual banks
may incur deficiencies through unexpected deposit
outputs and corresponding reserves losses through
clear Other banks will receive these deposits and the rate increase
subloans consequently, but the banks that
They lost them, the Mayans will not be able to reduce the outstanding.
investment loans requested to restore your
reservations to meet required levels within the requested
time period. In any case, to the bank may
take providers temporarily from their
bank reservation.
The bank client is supposed to buy for taking
loaned $100 Based on the management's judgment
voluntary bank reserves will be sufficient to provide
the necessary funds, the client is comfortable. the loan
it is a sign of the increase in 'loans' and crediting them
clients deposit account now bank deposit method
tenderly increased by $100 However,yesreservations_are
insufficient support for the highest deposits, Bank One
Desire to have $10 reserve deficiency, assuming requirements
ten percentSee illustration 26.Bank A can
borrow $10 temporarily from your Federal
reserve Bank, which makes a loan by increasing its asset
loans for depositary institute -cions
crediting Bank As reserve account Bank A
profits reserves and corresponding responsibility
loans from the Federal Reserve BanksSee
illustration
To repay a loan, the bank must earn reserves.
through any deposit growth active
 open operations.
Loans to deposit institutions Discount window as a tool of
monthly averages, billions of dollars, no
seasonal balanced Although expansion through borrowing is
start - adopt banks, the reserve amounts that banks
4r------------------- obtaining in this way is extraordinarily limited by
créextended here
the Federal Reserve administration of discounts
Adjustment
3 window for controlling the loaded bank rate
seasonal
credit adjustment loans - discount rates 17

Loans are made only for approved purposes,

2
Another reasonable source of available funds should be
having a totally utilized state. Moreover, banks are
discouraged since loan adjustment_credit also
frequently or extensively for periods.
Lift the discount qualification to
o
1985 1987 1989 1991 increasingContainedloanitsrelativecostfor
_
alternative cost reserve sources

The management of the discount window is a

must be refunded within a short hour that important complement for the other Federal Reserve
loans are mainly made to cover
monetarypolicytools. whilethe
needs created by fluctuating time in
loan privilege offer rate "the security valve" for
deposits and loans relative to usual patterns temporarily alleviating serious ones in the reserve positions of
Adjustments, such as stock sales, made by something
individual banks, there is generally an outer incentive
banks to "get out of the window" tend to
bank branch to pay loans before adding more
transfer reserve shortage to other banks and may
for loans and investments.
force these other banks to lend.
especially in periods of heavy credit demand. 16 The credit of adjustment is a short-term credit available to meet
Including sometimes when the total volume of temporary funding needs. Seasonal credit is available.
adjustment credit growing loan something for younger periods for smaller institutions.
seasonal regular needs for extended credit may be
individual banks are reimbursing loans time made available to an institution or group of institutions that
others are in debt sustained liquidity pressures. The reserves provided to
through extended credit loans are generally offset with
Credit adjustment loan generally increases the open market.operations.
in periods of increased business activity 17flexible discount rates related to money market rates
when the public's credit demand increases funding sources are currently loaded with seasonal credit and
faster than the unmet demands Credit extension pending for more than 30 days.
reservations are being provided by Market System

24 [ Modern Mechanics of Money

hey

Factors Affecting Bad Revenues1 23

26 A bank may incur a reserve deficiency if it makes
loans when it has no excess reserves.
BANK

Assets Liabilities
Loans +100 Deposits +100
Reserves with
F.R. Banks no change
{Required +/07
Deficit /Oj

27 Borrowing from a Federal Reserve Bank to cover such a deficit is accompanied by a direct credit.tothe
bank's reserve account

FEDERAL RESERVE BANK BANK

Assets Liabilities Assets Liabilities

Loanstodepository Reserve accounts: Reserves with Borrowingsfrom
institutions: Bank A + 10+ --- +F.R.Banks + 10 F.R. Banks + 10
BankA + 10

No further expansion can take place on the new reserves because they are all needed against the deposits created in (26).

28 Before a bank can repay borrowings, it must

gain reserves from some other source.
BANK A

Assets Liabilities
Securities - 10
Reserves with
F.R. Banks + 10

29 Repayment of borrowings from the Federal Reserve Bank reduces reserves.

FEDERAL RESERVE BANK BANK

Assets Liabilities Assets Liabilities

Loans to depository Reserve accounts: Reserves with Borrowings from
institutions: Bank A - 1O +---+F.R. Banks 10 F.R. Banks 10
BankA - 10
ChangesInReservationRequirements proportions
the Board has not changed any reserve requirement
until late 1990. (The original maturity
rest requirements for non-personal time deposits
Therefore, we have to describe actions
shortened several times, once in nineteen eighty and
affectThe volume of bank reserves and their impact
twice in 1983, in connection with behavior
transactions have to do with the capacity of banks
take the measures to deregulate the fees paid on the
to expand their assets and deposits. That is also
deposits.)InDecember 1990, the Board reduced the
possible to influence deposit and expand -sion or
personal time off reservation requirements
contraction by changing the minimum requirement
European currency deposits have dropped from 3 percent to zero.
reserve requirement for deposits.
Starting in April 1992, the reserve requirement on
Toe authority forto varyrequired reservation transactions accounts in decimal the lower reserve branch was low
percentages for banks that were members of the and from 12 percent to 10 percent
Federal Reserve System (member banks) was: first
When reserve requirements are reduced, a
granted by Congress for the federal reserve Board of
part of the banks' existing values in required portfolio
governors in 1933. Toe ranks within which
reserves become excess reserves and greater than borrowed
this authority has had its state changed
reverse. For example, with a requirement of 10 by
several times, more recently in Monetary Control One hundred, $10 reservation would be required for support $100
Act 1980, which provided for the establishment of deposits. Illustration 30 But to reduce - tion in the
reservation requirements that apply uniformly to all legal requirement for 8 percent would make the tie go up
depository institutionsToe1980statute only $8, releasing $2 out of every $10 in reserves for
established the following limits:
Using additional credit and deposit bank.
transaction accounts Verilustration 31
A increase in reserve requirements, in the other hand,
first $25 3% additional reserve funds absorbed, and banks which have without
millions for 8% a14%
excess reserves to acquire reserves or reduce loans
over $25 0% to 9% Investments will avoid reserve deficiency. Therefore,
millions
increase
0onimpersonalhour
deposits
original due dates of under four years.)
Toe 1980 law initially placed them as a requirement in
againsttransactionaccountsover$25millionat During the phase in the period, which ended in 1984.
12 percent and that against non-personal deposit hours for most members banks in 1987 for more no is
3 percent Toe initial $25millionslow member institute -tutions, requirements changed according to
we reserved it to be indexed for change every year online predetermined paraahorario, without any action by the
80 percent of the growth in account transactions Federal Reserve Board. Apart from this legally
in all deposited institutions (For example, the low prescribed changes, once the money - taradoControl
reservation segment increased by $41.1 million for Actuarial provisions were implemented in the late 1980s.
1991 for $42.2 million for 1992.In["addition","reserve"]
requirements to impose on certain sources of funding that
261Modern Mechanics of Money
they are not deposits, like the eurocurrency liabilities.18(
initially the table will set 3 requirements of
percentage in euro currency passive.)
ToeGam-StGermánActuardemil
nine hundred eighty-two modified these provisions
somethingforeximido desde reserva requisitos el: primero $2
total reservable passive million in a deposit chain_
institution. Similar to the low reserve adjustment for the branch
transaction accounts, the $2 million 'resalable liabilities'
exemption amount was indexed to 80 percent annually
totalincreaseinreservableliability. (For example, the amount
the exemption increased from$3.4millions for 1991
for $3.6 million by 1992.)
ToeFederalReserveAuthorizedTables
to change, at its discretion, the percentage requirements in
transaction accounts on the lower reserve tramoy
personal deposits within the ranges
indicated above.InIn addition, the Board may impose
different reserve requirements in non-personal deposit hours
established in the maturity of the deposit (The Board
initially tax the 3 percent not by - son now
Factors Affecting Bank Reserves
1 25
deposit requirements only in deposits with
in the requirement from 1opercent to 12 percent would make
required momentum reserves for $12 for every $100 of
deposits. Assuming that banks do not have excess of
reserves, this would force them to liquidate assets until those
the reserved deficiency was eliminated
At what point of deposits would it be a sixth less than before.
See illustration 32.

Restoration of Requirements and Monetary Policy

Your power to change the reservation requirements,
how purchases and sales of securities by the Federal Reserve,
It is a monetary policy instrument. Even small
change requirements - let's say, half a point
percentage-can-have large a and extended impact Other
monetary policy instruments sometimes state
used to cushion the initial impact of a change in
the reservation requirement. Thus, the System will sell values
(I understand that otherwise it would be inappropriate)
to absorb part of the reserves published by the Court in
requirements
They should be indicated in addition to their initial.
Impact on excess reserves, changes in requirements to alter them
expand the energy expansion of each dollar reserve. Therefore, such
changesaffecttake advantage of all subsequent increases
decreases in reserves from any source. For this reason,
changes in the total volume of Banco Reservas Really
held between points in time when requirements differ from
make no provision for a precise indication of the Federal of
political reserve behavior.
Both the reserve balances and the cash of the
vault are eligible to meet reserve requirements for
the degree something institutions normally sustain vault
cash to meet needs
amounts that exceed their required reserves are few
likely that itthey are affectednot changing in
requirements

The 1980 statute also establishes that "under circumstances

extraordinarythey canimpose reserve requirements in any
level . ? in any capacity of the deposit institutions up to six
months; and if it is essential for the conduct of monetary policy,
supplementary requirements arecan imposeup to 4 percent of the
transaction accounts.
30 Under a 10 percent reserve requirement,
$10 of reserves are needed to support each
BANK

$100 of deposits. Assets Liabilities

Loans and Deposits 100
investments 90
Reserves 10
{Required
LExcess

31 With a reduction in requirements from 10

percent to 8 percent, fewer reserves are
BANK A

required against the same volume of deposits Assets Liabilities

so that excess reserves are created. These can Loans and Deposits 100
be loaned or invested. investments 90
Reserves 10
{Required
LExcess
FEDERAL RESERVE BANK

Assets Liabilities

There is no change in the total amount of bank reserves.

32 With an increase in requirements from 10

percent to 12 percent, more reserves are
BANK

required against the same volume of deposits. Assets Liabilities

The resulting deficiencies must be covered by
Loans and Deposits 100
liquidation of loans or investments ... investments 90
Reserves 10
{Required
Deficit

FEDERAL RESERVE BANK

Assets Liabilities

... because the total amount of bank reserves remains

unchanged.

Factors Affecting Bank Reserves2 17

 foreign deposit bank held at
American bank, and pay this deposit in dollars
Changes in related factors usingyour foreign currency deposit at the Bank
the exterior Central Foreign. (The federal reserve may have
Forex trading foreign investments in currencies
ToeFederalreservehascommitted to establish your deposits in the Foreign Central
foreign operations of divisions for their own account Bank, but it would not affect us Bank reserves.
since 1962. In addition, Like the account of the Federal Reserve at the Bank
such facts as agents abroad currency records of Central Foreign charged, foreign banks
the Central Bank reserves increase
We Treasury, and since the 1950s has executed Foreign. In turn, the dollar deposit of the bank
transaction - foreign client transactions foreign in the U.S. bank decreases to
central banks. Perhaps the type of transaction in currency as the American bank transfers
more advertised foreigner that makes the Reservation property of those dollars for the Federal Reserve
Federal is the intervention in the foreign exchange market.
exchange markets _ Intervention, however, it is only
one of several transactions related to the 28 Modern Mechanics
1

foreigners who have the potential to increase or

decrease the reserves of the banks, therefore
moving money and credit growth.
Various transactions related to foreign countries
y sus efectosennosotrosBancoreservasestándescrito
In the next few pages, something is included but not much.
all types of transactions used. Without
embargo, the key point to remember is that the government
federal reserve routinely compensations none
not desired to change
we Reserve Bank resulting from related
with the foreign transaction -cions _ As to
result, such minutes do not affect money and credit
growth in the United States
Exchange intervention on accountown of the
Federal Reserve
When the Federal Reserve intervenes in the
currency markets to sell dollars on account
own, acquires
19
foreign currency assets and reserves
The U.S. banks initially increased. You found,
When they intervene to buy dollars
for your own account, those foreign currency assets
pay for the dollars bought and our reserves
banks initially autumn.
Consider the example of the Federal Reserve.
intervene in foreign exchange market for
sell $100 of
self-employed US dollars In this
transaction, the Federal Reserve buys a deposit
denominated in foreign currency to us Bank
foreign commercial bank held20Singapore
foreigners must deposit by crediting $100 to the
we reserve banks in the Fed. Finger
from the Federal Reserve deposits foreign currency
product in itsbank accountForeign Central, and
as this transaction is settled, the reserves of the
banco extranjero en el Banco Central Extranjero
decrease. Verilustración 33 on pages 30-31.
Initially, then, the Fed's intervention reduces
dollars in this example lead to an increase in Federal
foreign-denominated assets bank reserve
currencies and an increase in reserves
American banks.
Suppose instead of the Federal Reserve
intervenes in foreign exchange markets for
buy $100 from us dollars, again for your own
toe count Federal reserve purchases one dollar
 the physical exchange of coins and currency. Rather, most of
these transactions represent the buying and selling of goods
foreigners. currencies by exchanging a bank deposit
Assets of the Federal Reserve Bank denominated in a currency by another bank deposit denominated in
denominated in foreign currency another currency. For the ease of presentation, the examples assume that
we banks and foreign sand the banks are the market
end of the month, billions of dollars, without seasonally adjusting
r------------------,
Participants in the intervention records, but the impact on reservations would be
40 it would be the same if the foreign public were involved.

30

20

10

1982 1985 1988 1991

throughof a charge of $100 to your reservation account in the

Federal Reserve. Illustration 34 on pages 30-31.
Initially, then, the Federal Reserve intervention buys
dollars in this example leads to a decrease in Federal
foreign currency denominated asset bank reserves
decrease in reserves of our banks.
As previously indicated, the Federal Reserve
compensations 'ster - ilizas' none desired
they will change us Bank reserves from sales or
dollar purchases for exchange rate intervention. For
example, Federal Reserve Bank assets name - born in
foreign currencies Dramatically in 1989, in part
significant due to our intervention in dollar sales
(Graph on this page.) Total reservations of us
banks, however, decreased slightly in 1989 as open
operationmarketforceusedto"ster - ilizar"the
initial intervention induced increase in reserves
Monthly Revaluation of Assets in Currency
ForeignAnother set of accounting transactions
what affects
Federal Reserve Bank foreign-denominated assets
current
The monthly revaluation of assets.
business days prior to the end of the month, those of the Fed
foreign exchange assets have increased in its market
value has appreciated or decreased if its value has
depreciated. Convergence compensation accounting
entry into the balance sheet sheets spread them
translation exchange account included in another FR
passive. "These changes in the Fed balance sheet.
make no changes to reserve bank directly. However,
given that the Federal Reserve delivers its net earnings to
Treasury every week, the revaluationofeffects the Montode
the Fed paid for Treasury, in which they will influence
tireTalladeTI &Lcalls and bank reserves (see
explanation on pages 18 and 19.

19
it was the responsibility of the intervention of the U.S. in the
foreign exchange markets fall on the U.S. Treasury. The transactions of
currencies by the Federal Reserve account are carried out in accordance with the
directives issued by the Open Market Committee of the Reserve
Federal within the general framework of the exchange rate policy established by
the U.S. Treasury in consultation with the Federal Reserve. They are implemented
at the Federal Reserve Bank of New York, generally at the same
time that similar transactions are executed for the Fund of
Treasury Exchange Stabilization.
20Americans traveling abroad commit to the countries.
foreign exchange operations as long as they obtain currencies and
foreign banknotes in exchange for our coins and currency. Without
embargo, more foreign exchange transactions do not involve

Factors Affecting Bank Reserves2 17

Transactions related to foreign entities for the an increase in your asset 'SDR Certificate Account' and
Treasure increase in your responsibility"other deposits
(FSE account)
we intervention abroad exchange
The federal reserve markets are generally divided. Ifthe FSE uses these deposits in dollars
Between your own story and those of the treasure exchange directly in a dollar reduction intervention, then the
Stabilization Fund (FSE) toe account impact the increase induced by the intervention in the reserves
in usBank reserves from the intervention U.S. banking activities are not affected. See illustration -
transaction is the same for both things - Sales of actions35and37onpages30-31.Yesunnecessary
dollars increase reserves while purchases immediately for a transaction intervention, the FSE
Dollars deplete the reserves. Consult the illustration. It may be that I use dollar deposits since my issuance of
35 on pages 30-31. Depending on how the DEG certificates to buy values
Treasury payer, finances, part of the However,
it is possible that the Federal Reserve may not need to make
compensatory open market operations.
operations.
Toe Treasury typically maintains
onlyminimumbalances in the ESFs account in the Reserve
Federal. Therefore, the Treasury generally holds
paraconvertir algo FSE activos dentro
foreign currency deposits requested to pay for
I am part of an intervention operation. Likewise, the
dollar or foreign currency deposits acquired
by the FSE in intervening - they are usually withdrawn
when the EU budget invests the income in obtaining
assets.
For example, for Finance an intervention decreases
dollars (as shown in illustration 35), the
Treasury could redeem some of the values of the
U.S. government issued for the FSE, resulting in a
transfer funds from the Treasury Balances (account
general) in the Federal Reserve to the ESF account at the Fed.
(In the Federal Reserve ballroom, the FSE account is
includes in the liability category 'other deposits.' ) Finger
from the Treasury, however, you would need to stop to replace his
fed balances for seasonal levels, perhaps
increasing the size of the IT&L calls, a
transaction that drains us Bank reserves Finger of
intervention and financing operations
essentially occur simultaneously.Howresult
we Bank reserves added in the intervention
the dollar discounts are to compensate for the drains
We Reserve Bank from the Call TI&L. See
illustrations 35 and 36 on pages 30-3l. Therefore, without
federal reserve compensation behavior would be
necessaryyesthe treasure financed the intervention reduced
dollars through
a TI&L call in banks.
Compensatory actions would be needed on the part
from the Federal Reserve, however,yesTreasury
restaurant deposits affected by related to the
extranjeroactasa través deanúmerodetransacción -
actions involving the Federal Reserve. These
they include the Treasury issue of SDR or certificates for
the Federal Reserve and the 'storage' of foreign
coins for the Federal Reserve.
SDR, categories. Occasionally the Treasury acquires
dollar deposits for the FSE account for issuer certificates
Federal Reserve against special assignments
draw _Rights(DEG)received from the international
Monetary Fund.21$3.5 billion
DEGcertificadosse emitieronen1989,yotro$1.5mil
millions in 1990. This 'monetization' of DEGes
reflejadoenlosFederalde reservabola hoja de ance como
 U.S. gold stock, gold certificates and
SOR certificates
end of a ñor, billions of d ólares

1951 1961 1971 1981 1991

from the Treasury, resulting in the transfer of funds 20

from the Federal Reserve to the FSE
treasure count them nourished. we bank 15
would reserve later increase as the Treasury spent the
funds or transferred them to the banks through 10
direct investment for IT&L Note accounts
Gold values and certificates, category. Changes in 5

US monetary policies or values used to be

unimportant bank factor that affects reserves Without o l.u..LL..u..Ju..L.l....wu..L..U..LJ..11... lllllmi LJ..J..I..L.J.J.J..LL.J.J...LJ
embargo, the values or certificates issued for
the Federal Reserve in 'monetizing' gold, has not
changed significantly since the beginning of the
1970s. (See chart on this page.)
Prior to August 1971, the Treasury purchased and
gold sold for reparation price conditions of
we dollars, mainly in the initiative of
foreign central banks and governments gold bets
The treasury was added for our stock.
deoro monetario , y pagado de su cuenta en la Reserva
Federal.Asthe sellers deposited the treasury
checks in the banks, the reserves increased. For
replenish your balance at the Fed, the Treasury issued
gold certificates to the Federal Reserve received to
credit to deposit equilibrium.
TreasurySales of gold have the opposite effect
Buyer checks are credited to the account.
of the Treasury and reserving decrease. Because the
officially we are now valuescompletely
"monetized", the Treasury currently has to use
your deposits to withdraw the gold certificates
issued to the Federal Reserve when it is a problem
sold. However, the withdrawal value of
gold certificates, as well as the net contraction of
bank reserves, established in the official gold
price. Product starting from a gold discount in the
market price for meeting the demands of the
national buyers would probably be
older. The difference in fingers represents the
treasure profit, which, when spent, restores
deposits and Banco Reservas please I like Amount.
While the Treasury no longer buys gold and sells
limited state resourcing, increases in official price
the gold has been added to the value of the stocks of
gold. ( last official price is high,
$38.00 for $42.22 per troy ounce, in 1973.
Storage.The Treasury sometimes acquires
dollongdeposits in the Federal Reserve by
foreign currency storage
Fed. (For example, $7 billion of
foreigner

21Theywere created in 1970 to be used by unofficial governments in equilibrium.

payment records.

Factors that affect reservations

banking2 91
 33 When the Federal Reserve intervenes to sell dollars for its own
account, it pays for a foreign-currency-denominated deposit of a U.S.
FEDERAL RESERVE BANK

bankata foreign commercial bank by crediting the reserve account of Assets Liabilities
the U.S. bank, and acquires a foreign currency asset in the form of a Deposits at Reserves:
deposited ForeignCentralBank. The Federal Reserve, however, will Foreign Central U.S. Bank + ◄
4
100 t-- - - -
offset the increase in U.S. bank reservesif it is inconsistent with Bank + 100
domestic policy objectives.

34 When the Federal Reserve intervenes to buy dollars for its own.
account, it draws down its foreign currency deposits at a Foreign
FEDERAL RESERVE BANK

Central Bank to pay for a dollar-denominated deposit of a foreign bank Assets Liabilities
data U.S. bank, which leads to a contraction in reserves of the U.S.
bank. This reduction in reserves willbeoffset by the Federal Reserve
Deposits at
Foreign Central
Reserves:
U.S. bank ◄
- 100 4 r-- - - -
ifIt is inconsistent with domestic policy objectives. Bank - 100

35 In an intervention sale of dollars for the U.S. Treasury, deposits of the ESF at the Federal Reserve are used to pay.
for a foreign currency deposit of a U.S. bank at a foreign bank, and the foreign currency proceeds are deposited in
an account at a Foreign Central Bank. U.S. bank reserves increase as a result of this intervention transaction.

U S TREASURY FEDERAL RESERVE BANK

Assets Liabilities Assets Liabilities Assets Liabllities

◄- - - -
Deposits at Reserves:
F.R.Banks 100 U.S. Bank + 100 4

Deposits at Other deposits:

Foreign Central ESF - 100
Bank + 100

36 Concurrently, the Treasury must finance the intervention transaction in (35). The Treasury might build up deposits in
the ESF's account at the Federal Reserve by redeeming securities issued to the ESF, and replenish its own (general
account) deposits at the Federal Reserve to desired levels by issuing acallonTI&Lnoteaccounts. This set of transac-
It drains reserves of U.S. banks by the same amount as the intervention in (35) added to U.S. bank reserves.
U.S. Treasury FEDERAL RESERVE BANK

Assets Liabilities Assets Liabilities Assets Liabilities

U.S. government
securities • 100
TT&Laccounts - 100
Deposits at
Securities
issued ESF 100
Reserves:
U.S. banks - 100 4 ◄ t-- - - -
Deposits at F.R.Banks net O Treas. deps.:
rfromu.s. +100l-IOOJ
net O
F.R.Banks +100 Í (romu.s.bank + I00l
LtDESF
an1
LtD ESF -l°'l}
Other deposits:
ESF + 100

37 Alternatively, the Treasury might finance the intervention in (35) by issuing SDR certificates to the Federal
Reserve, a transaction that would not disturb the addition of U.S. bank reserves in intervention.
Reserve, however, would offset any undesired change in U.S. bank reserves.

, ESF U.S. TREASURY FEDERAL RESERVE BANK

Assets Passive Assets Liabilities Assets Passive

Deposits in Certificates Certificate account Other deposits:
FRBanks +100 DEGs issued SDR+100 FSE+ 100
for
FRBanks + 100

301Modem Money Mechanics

 we BANK FOREIGN BANK FOREIGN CENTRAL BANK

Assets Liabilities Assets Liabilities responsibilities

Assets Deposits of
Reservascon Reservascon Deposits of FRBanks + 100
IjlFRBanks + 100 foreigners Center of U.S. UU. Reservations of
bank 100 Deposits in the bank 100 foreign bank •
foreign bank 100 100

U.S. BANK FOREIGN BANK Foreign Central Bank

Assets Liabillties Assets Liabilities Assets Liabilities

Reserves with Deposits of Deposits at Deposits of
----IJI• F.R. Banks • 100 foreign bank - 100 U.S. bank • 100 F.R. Banks • 100
Reserves with Reserves of
Foreign Central foreign bank+100
Bank +100

your S. BANK FOREIGN BANK FOREIGN CENTRAL BANK

Assets LiabilitiesAssets Utilities Assets Skills

Reservascon Reservations with Deposits of Deposits of
IJlFRBanks +100 foreigners Center of the U.S. UU. FSE +100
bank 100 Deposits in the bank• 100 Reserves of
foreign bank 100 foreign bank
100

U.S. BANK

Assets Liabilities
Reserves with TT&Laccts. • 100
------IJI•F.R. Banks • 100

US. BANK

Assets Liabilities

Facts Affecting Bank Reserves31 1

 the coins were stored in 1989.) The Treasury or
Marketable U.S. government securities held in
ESF acquires foreign currency assets as a result custody for foreign customers during 1991
of transactions - such as sales of Wednesdayoutstanding amounts, billions of dollars
intervention of dollars or the sales of securities of
U.S. government denominated in foreign currency. 265
When the Federal Reserve stores foreign currencies
for the Treasury,22the assets of the Reserve Bank
They are called federal - denominated in foreign currency 255
increase just like the Treasury deposits in the
Federal Reserve.Asthey are sitting there
deposits, increase the reserves of banks in the U.S.
245
when will it buy foreign currency again
stored by the Federal Reserve (in 1991, it was repurchased
$2.5 billion in foreign coins stored.
foreign currency-denominated assets currencies
Transactions for Foreign Clients
Many central banks and foreign governments
they maintain deposits at the Federal Reserve to facilitate the Managingforeign deposits through purchases of securities
transactions denominated in dollars. These "deposits
ties.Foreign customers of the Federal Reserve also receive
"foreigners" on the passive side of the Reserve balance
a variety of dollar-denominated payments, including pro-
Federal generally remains at minimal levels
proceeds from intervention purchases of dollars by foreign
that vary little from one week to another. For example, the
central banks, that are drawn on U.S. banks.Asthese funds
foreign deposits in the Federal Reserve averaged
are credited to foreign deposits at the Federal Reserve, re-
only $237 million in 1991,whataretheygoingfrom $178 million for
serves of U.S. banks decline. Butif receipts of dollar-denom-
$319 Incentivized payments raise their deposits at the Federal Reserve.
millions on average weekly. Changes abroad to levels higher than desired, foreign customers will buy U.S. _
the deposits are small because foreign clients 'manage' government securities. The net effect generally is to leave
their Federal Reserve balances to the desired levels U.S. bank reserves unchanged when the U.S. government
daily through the buying and selling of securities of the
securities are purchased in the market
U.S. government. The scope of these transactions from
cash management Using the swap network.Occasionally, foreign central
reflects, in part, in large and frequent changes in the banks acquire dollar deposits by activating the 'swap' net
market. work, which consists of reciprocal short-term credit arrangements
negotiable securities of the U.S. government held ments between the Federal Reserve and certain foreign
in custody by the Federal Reserve for clients central banks. When a foreign central bank draws on its
foreigners.(See the graph). The net effect of swap line at the Federal Reserve, it immediately obtains a
dollar deposit at the Fed in exchange for foreign currencies,
thecustomer cash management transactions
foreigners - the general rule is to leave the reservations and agrees to reverse the exchange sometime in the future.
U.S. bank rates unchanged. On the Federal Reserve's balance sheet, activation of the
swap network is reflected as an increase in Federal Reserve
Foreign deposit manager through sales of Bank assets denominated in foreign currencies and an in-
values.Foreign clients of the Federal Reserve increase in the liability category 'foreign deposits.' When the
they make payments denominated in dollars, including the When the swap line is repaid, both of these accounts decline. Reserves
corresponding to the dollar intervention sales by of U.S. banks will rise when the foreign central bank spends
from foreign central banks, through the provision its dollar proceeds from the swap drawing.See illustration
of their deposits in the Federal Reserve.Howthese funds 41.Incontrast, reserves of U.S. banks will fall as the foreign
they are central bank rebuilds its deposits at the Federal Reserve
deposited in U.S. banks and compensated, reserves in order to repay a swap drawing.
U.S. banks are rising.See illustration 38. The accounting entries and impact on U.S. bank re-
However,yesthe payment of your accounts at the Reserve
serves are the sameifthe Federal Reserve uses the swap
Federal reduce the balances below the levels
network to borrow and repay foreign currencies. However,
desired, foreign clients will replenish their deposits
the Federal Reserve has not activated the swap network in
from the Federal Reserve selling government securities of
recent years.
U.S. Actinghowyour agent, the Federal Reserve
usually executes customer sales orders
foreigners in the market. buyers pay
for the values through the arrangement of deposits in
U.S. banks, the reserves of U.S. banks.
they offset the increase in reserves of the 22Technically, warehousing consists of two parts: the Federal Reserve's

Agreement to purchase foreign currency assets from the Treasury or ESF

disbursement transactions. The net effect is to exit for dollar deposits now, and the Treasury's agreement to repurchase the
We Reserve Bank without altering When we foreign currencies sometime in the future.
govern - credit titles are sold in the market
321Modern Money Mechanics
foreign clients.Illustrations 38 and 39.Every now and then
when,however,theFederalReserveexecutesordersof
sale of foreign clients with the System account
When this is done, the increase in reservations is maintained.
for the disbursement of funds from foreign clients
place.Verilustraciones38y40the Federal Reserve
I could choose to execute sell orders with the account of
Systemyesan increase in reservations is desired for purposes
on internal politics. reasons.

Factors Affecting Bank Reserves1 3 3

 38 When a Foreign Central Bank makes a dollar-denominated payment from its account at the Federal Reserve, the
recipient deposits the funds in a U.S. bank.Asthe payment order clears, U.S. bank reserves rise.

FEDERAL RESERVE BANK U S BANK FOREIGN CENTRAL BANK

Assets Liabilities Active Passive Assets Passive

s
Reservations: Reservations with Depó sites + 100 Depósitos accounts
bankAmerican + 100.+ FRBancos + 100 in -100 to be paid 100
FR Banks
Foreigner
depó sitos -100

39 If a decline in its deposits at the Federal Reserve lowers the balance below desired levels, the Foreign Central Bank
will request that the Federal Reserve sell U.S. government securities for it If the sell order is executed in the
market. reserves of U.S. banks willfallby the same amount as reserves were increased in (38).

FEDERAL RESERVE BANK U S BANK FOREIGN CENTRAL BANK

Assets Passive Assets responsibility Assets Passive

is
Reservations: Reservascon Depósitosof Deposits in
bank 100.+BanksFR 100 values FR Banks + 100
American
himself
Deposits buyer 100 U.S.
foreigners + 100 government 100
values

40 If the sell order is executed with the Federal Reserve's account, however, the increase in reserves from (38) will
remaining in place. The Federal Reserve might choose to execute the foreign customer's sell order with the System's
account if an increase in reserves is desired for domestic policy reasons.

FEDERAL RESERVE BANK U.S. BANK FOREIGN CENTRAL BANK

+
Assets Liabilities Assets Liabilities Assets Liabilities
U.S. government Foreign Deposits at
securities + 100 deposits + 100 F.R. Banks + 100
U.S. government.
1
securities 100

41 When a foreign central bank draws on a 'swap' line, it receives a credit to its dollar deposits at the Federal Reserve.
Reserve in exchange for a foreign currency deposit credited to the Federal Reserve's account Reserves of U.S.
banks are not affected by the swap drawing transaction, but will increase as the Foreign Central Bank uses the
funds asin (38).
FEDERAL RESERVE BANK U S BANK FOREIGN CENTRAL BANK

Assets Passive Assets Passive Assets Liabilities

Deposits in the Deposits Deposits in Deposits of
Foreigner foreigners + 100 FR Banks + 100 FR Banks +100
Central

341Modern Money Mechanics

Bank + 100

Factors Affecting Bank Reserves1 3 3

 Federal Reserve Behavior Impact on the reserves of the transactions of the
Moving contributions of Federal Reserve in government and agency securities
U.S. federal
StatesUnitedGovernment Values Federal Reserve Transaction Reservation
Total Purchases Impactofvalues
Aldiscuss various factors that affect reservations, is
From the distributor in the market Permanent increase
It has often been noted that the Federal Reserve offsets the To complete the sales orders of the Increase
internal clients permanent (No
unwanted changes in bookings through operations ( Si las órdenes de venta de los clientes se llenan impact
in the open market, that is, through the buying and selling of in the market
values of the US government in the market. Without Cash sales of securities Decrease
to the distributor in the market permanent
embargo, the direct purchases and sales of securities - The To complete the purchase orders for the Decreased
commitments of the Federal Reserve in the market occur internal customers permanent No
If customers' purchase orders impact
with little frequency, and generally, they are carried out they complete in the market
when an increase or a decrease in another is expected Repurchase agreements (RP) Temporary increase
factor persists for some time. Most of the With distributor in the market in a PR System

market actions taken to implement changes in Matched purchase-sale agreements Temporarily decrease
(MSP) No impact*
monetary policy or to compensate for changes in others With a distributor in the market in an MSP System
To fulfill client RP orders ( Temporary increase
factors are achieved through the use of transactions that internally
The reservations change temporarily.Moreoverthere is If the client's RP orders are passed to
market likeRP related to the Sin impact
off-market transactions that the Federal Reserve has client Decrease
permanent
sometimes used to change its holdings of Redemption of mature values Increase
Values of the U.S. government and affect the reserves. Replace total amount maturing permanent
Redeempart of the amount due
(Rememberthe Buy more than the amount that expires
example in illustrations 38 and 40.) Impact of the finger of
foot in the reserves
of various transactions of the Federal Reserve in securities of they decrease again when the intermediaries buy back
the US government and federal agencies are explained to the values. - rities _ Therefore, the RP of the system
continuation.(Consult the table for a reservations increase only temporarily. The reservations are
resumen). temporarily exhausted when the Fed executes what is
known as an 'MSP System'. An MSP system works
Direct transactions.The property of the like the PR System, only in the opposite direction.In
values are permanently transferred to the buyer in a
In the MSP system, the Fed sells securities to distributors in
direct transaction - cion, and the funds used in the
the market and commits to repurchase in a day
transactions are permanently transferred to the seller.
determined. The holdings of securities and bank reserves
As a result, a direct purchase of securities by
The Toe System is reduced during the validity of the MSP.
the Federal Reserve to a broker in the market adds
but both increase when the Federal Reserve buys back
reservations permanently, while a sale
the values.
direct value transfer to a broker drains the reserves in a way
permanent. As long as the Federal Reserve can achieve the same
net effect on reserves through off-market transactions
of the market in which it executes buy and sell orders
directly from customers internally with the account of
System.Incontrast, there is no impact on the reserves
Federal Reserve: fill clients' total sell and orders
buy at the market.
Temporary transactions.The agreements of
repurchase (RP) and matched purchase-sale agreements
(MSP) associates transfer the ownership of securities and the
temporary use of funds. In a PR transaction,
one party sells securities to another and agrees to return
buy them on a specific future date.Ina
MSP transaction, one party purchases securities from another and
You agree to sell them on a specific future date. So,
inessence, a PR for one of the parties in the transaction
it works as an MSP for the other party.
When the Federal Reserve executes what it refers to
like the "PR System", it acquires values in the markets
from distributors who accept to buy them back
specific future date 1 for 15 days later. Both things
those of the portfolio system of values and reserves
banking activities increase during the validity of the RP, but

361Modern Money Mechanics

 Impact based on the assumption that the number of RP orders
internally carried out is the same as the previous day.
Currently, the Federal Reserve is legally prohibited from purchasing securities.
directly from the Treasury, except to replace maturing issues.

Federal toe reserve plus MSP uses for

fill RP orders from foreign clients internally
with the system account considered in isolation,
an MSP transaction of the Federal Reserve - connection with the
customers would temporarily exhaust the reservations.
these acts occur every day, with the
totalMonto de PRpedidossiendoequitativamente
established from day to day. Therefore, in no case
day, both things bought feed values
delayed by clients to be carried out in the previous days
MSP, and sell them for the same amount of values
for
satisfy days agreement. As a result, there.
Generally small or no impact on reservations
When the fed uses MSP for
complete the RP orders of internal customers
with the system account. Sometimes, however, the Reserve
Federal: fill in some of the RPs that are ordered internally and
the rest in the market. The part that is transferred to the market
is known as 'customer-related RP'. Toe Fed
ends up repurchasing more values from customers to
complete the MSP from the previous day of what you sell in the
MSP of that day. As a result, the related PRs with the
clients temporarily add reservations.
maturingvalues.How it tastes for you
Mature Federal Reserve, exchanged for new ones
values. Generally, the total amount due is
replace so that there is no impact on the reservations, since
The total holdings of the Fed remain the same.
Occasionally, however, the Federal Reserve
will exchange onlyapart of the amount due. The
Treasury deposits decrease as the
payment of the redeemed values, and the reservesthey fall a
as the Treasury replenishes its deposits in the Reserve
Federal through Tf&L calls. The drainage of the
The toe reserve is permanent. The Fed will buy more of the.
number of values that expire directly from the Treasury,
then the reserves would increase permanently.
However, the Federal Reserve currently has
It is illegal to purchase securities directly from
Treasury, except to replace maturing emissions.

Factors Affecting Bank Reserves1 3 3

 In general, balances are accumulated through transfers from
deposits in American banks. Such transfers
Various factors that affect can be carried out directly, when these clients also
Bank Reserves they have deposits in U.S. banks, or indirectly
through the deposit of funds acquired from others who do
Toe of the described factors below normally they have accounts in US banks. Such transfers to
having neglected - stayed because the bank investigates other deposits drain reserves.
changes in them happen very slowly or tend to
to balance with concurrent changes in other factors.
But sometimes they may require compensation action.

Treasury currency in circulation

The circulating Treasury currency consists of
coins, silver certificates, and U.S. banknotes.
originally issued by the Treasury, and another currency
originally issued by commer -especialbancos and by
Federal Reserve Banks before July 1929 but for the
the Treasury has the responsibility of redemption. The
short-term changes are small and their effects on the
bank reserves are indirect.
amount of circulating Treasury currency
currently increases only through the issuance of a
new currency. Toe Treasury sends new coins to the
Federal Reserve banks for credit to deposits
from the Treasury there. These deposits will be withdrawn down again,
however, as the Treasury incurs expenditure - expenses _ The
checks issued against these deposits are paid at
public.As people deposit these
checks in the banks, deposits increase.
explanation on pages 18 and 19.
When any type of currency is withdrawn from the
Darling, bank reserves are decreasing. As
the banks deliver Treasury money for the rescue,
they receive bills or coins from the Federal Reserve at
change or a credit in your reset accounts, leaving
their total resets (reserve balances and cash in
vault) ini . -specially unchanged. However, the
Treasury deposits in the Reserve Banks are collected.
when the Treasury coin is withdrawn. The transfers
from the balances of IT&L in the banks to the banks of
reserve these deposits are replenished. Such transfers
absorbing Reviews

Treasmy cash
In addition to the accounts in deposit institutions and
Federal Reserve Banks, the Treasury maintains
some coins in their own vaults. The changes in
these holdings affect bank reserves just like
the changes in the Treasury deposit account in the
Resetve Banks. When holdings increase
Treasury currency, they do so at the expense of the deposits in
the banks.
Cash equivalent values in the portfolio of the
Treasury decrease, on the other hand, these funds
move within the bank deposits to increase the bank
Reviews

Other DepositsinReserve Banks

In addition to U.S. banks, the U.S. Treasury
UU. and foreign central banks and governments, there is
some interna - national organizations and certain
U.S.
381Modern government
Money Mechanics agencies that maintain
funds on deposit at the Federal Reserve Banks.
 When these clients turn to their balances of the
Federal Reserve (for example, to buy securities),
these funds are paid to the public and deposited in
U.S. banks, which increases the reserves
banking. Just like foreign clients, these
"other" clients manage their balances in the Reserve
Factors that affect resources
Federal up close, so that the changes in your banking35 1
deposits tend to be small and have an impact
minimum net in the reserves.

Adjustments related to floaters

Certain adjustments are incorporated into the data
published on reserve balances to reflect
corrections not related to flotation. - cions _
Such a correction could be made, for example, if a bank
the individual would have mistakenly declared fewer deposits
to charge those who really existed and would have
kept smaller receivable balances than
necessary in any previous period. To correct this
error, the bank's reserve position will be applied a
adjust the date not related to the flotation. this
essence results in the bank having to
maintain higher balances in your replenishment account
in the current and/or future periods of what would be
necessary to meet the restocking requirements in
those periods. The date adjustments unrelated
the floating capital affects the allocation of funds
in the reserve bank accounts, but not the amount
total of these accounts, as reflected in the Bank
of the Federal Reserve and in the balances of the banks
individuals. However, the published data about
the reserve balances are adjusted to show only the
reserve balances that are maintained to comply with
the current and/or future reservation period. requirements

Other accounts of the Federal Reserve

The previous sections of this brochure
they described the way in which bank resets
they increase when the Federal Reserve buys securities and
decrease when the Federal Reserve sells securities.
_ The same results derive from any
expenditure or receipt from the Federal Reserve. Any payment made
by the Reserve Banks, to cover expenses or
acquire any asset, affects the deposits and the
bank reserves in the same way as the payment to a
public securities broker. Similarly, the
interest receipts from loans and titles of the Reserve
Bank - The obligations and the increases in capital
paid absorb the reserves.
 The reserve multiplier: why
That varies

Expansion and contraction of the fingertip deposit of the section subject to a 3 percent reservation requirement
associated with a dice will change in BankReviews, such as Inaddition, the review multipliers affected by
illustrated before in this brochure, fictitious are repairers versions in counter deposits within foreign currency vice
to -deposit multi-purpose Who will multiply it vice versa This factor was important in the 1980s as
determined by uniform percentage review requirement the public wishes to have relative currency holdings for
specified by transaction accounts such an assumption is transactiondepositsmoneydisplaced
unsimplification of the real relationship between the changes inconsiderably. They also affect the multiplier the
the reserves and changes in money, especially changes between the included transaction deposits in
In the small run. For a number ofreasons, like money and other transaction deposits.accounts
discussed in this section, the amount of research they are also bookable but not included_in_money, such
associated with a given number of deposit transaction co-demand deposits due for the depositary
is constantly changing.
Unstick with mover the reviewers
multipliers variation in the amount of excesses
reservations.Inthe real world, the reserves not alwayshimself
they use completely. There is always some excess of
reserves in the banking system, which reflect frictions
y 1agscomofondosflow between thousands of individuals -
ualbanks
Excess of reservations presents a problem for the
monetary policy implementation only because the
Currency exchange. For the slanted that new investigates
supplied are to compensate for the increase in excess of
reservations, thegrowththe real money doesn't reach
theoretical maximum. On the contrary, a reduction of
excess reserves by the banking system have the
same effect on expansion as the injection of a
equalAmount
of new reservations.
Landslides increase from reviewing
requirements to impose on liabilities not included in the money,
as well as reviewing different proportions being applied
paratransaction deposits according to the size of
Bank. From 1980 through 1990, review requirements
They were imposed correctly on the transaction passive of all
depository institutions, and before then in all the
deposits of member banks. The multiplier of
the review of the toe was affected by flow
funds between institutions subject to different review
requirements, as well as for transfers of funds between
transaction deposits and other liabilities subject to
review requirements Toe extension of requirements
reviewforalldepositaryinstitutionsin1980andthe
elimination of deposit requirements against
non-personal time deposits and liabilities in
euromonies at the end of 1990 reduced, but I did not
remove, source of instability in the review
Multiplier. Toe of the foot deposit expansion
potential of
an unfinished investigation is still affected by
action shifts trans-deposits Between bigger
institutions yes plaster either exempt from requirements of
reserve or whose transaction deposits are within
36 1 Modern Money Mechanics
institutions, the government, and foreign
official bank institutionsInadd them, these
non-monetary transaction deposits are
relatively small compared to total corn
account transaction, the perolatavariar significantly
from week to week.
Injection of research poses widely
varies depending on the effects of how it is
absorbed. Only the dollar increase dollar by dollar in the
money supply would occur if the newresieves
were paid in foreign currency for the public. With auni
From the 10 percent reservation requirement, an increase
Each $1 in reserves would back $10 in accounts.
additional transactions.Ainclusive larger amount
I would make supported under the graduated system where
minor institutions are subject to review The requirements
are below 10 percent. However, $1 of
the new reserves would also support an additional $10
of certain accounts of reserveable transactions that do not
are counted as money. (See the chart at
continuation). Normally, an increase in the
reserves would be absorbed by some combination of
these coins. and transaction deposit changes.
All these factors are to some extent
predictable and taken into account in decisions
compare them to the reserve amounts that must
supplied to achieve the desired monetary rate
expansion. They help explain why in the short term
fluctuations in bank investigation frequency are
disproportionate to, and sometimes in the opposite direction
from, changes in the money deposit component _

The growth potential of an injection óin the

reservation of $1 million ón

$ 12.5 million
 Creation of money and management of reset Ironically, these modifications contribute to
The relationship between short-term changes in
Another reason for the short-term variation in the less variable relationship between changes in reserves and the
reserves and transaction deposits was quite
the amount of provided reservations is that expansion of changes in deposit
volatile before transaction
the Monetaryoccurred
Control Actasofthe relationship
1980••. between
credit - and therefore the deposit creation is variable, money acts (ml) and the economy deteriorated. Because of the measure
3.3 21
reflecting unequal credit demand synchronization. The money has become
Waakly less 1979
changas, useful here due to politics.
Although bank loan policies usually have Algomayor,
2.2
what attention do youTransaction
have displaced
deposits for 14
the broader?
it accounts for the general availability of funds, the size and measures M2 and M3. However, the relationships of the multiplier

'
the loan and investment calendar has been made under those of reserves for broader monetary measures are far away
rightsea/e
1.1 7
Policies largely depend on customers' credit more variable than by Ml.
needs.
Inthe true world, the loan banks are not
normally limited by the amount of excess -1.1 -7
reservations that you have at any given moment Quite a lot,
loans are made, or not made,
dependienteenlosbancoscréditopolíticasysu
expectations about their ability to obtain funding
necessary to pay the checks of their clients and
to maintain the required reserves in a timely manner.
Ofdone, because the Federal Reserve regulates regulations ••• and before adoption of contemporaneous
reserve accounting in 1984•••
ineffect since 1968 through early 1984
specified that the average required reserves for 3.0
a certain week should be based on average Weekly changas, 1983
deposit levels two weeks earlier (reservation 2.0 18
delayed accounting), deposit creation Really
preceding the provision of support reserves.A
principles of 1984, a more 'contemporary' reserve
accountingsystemwasimplementing - focused on
request to improve monetary control.
InFebruary 1984, banks displaced for
maintaining average reserves over two weeks
reservation maintenance period that ends on Wednesday
against the average retained transaction deposits
during the two-week computation period that
it ends only two days earlier. Under this rule, real
Transaction deposit expansion was planned for more •.• but less variable afterward.
closely approximated the process explained to the
beginning of this brochureHowever, something 4.0 46
Two-week changas, 1991
slippages still exist because of the short term
uncer - Questions about the level of both reserves and
from transaction deposits. close the reserve
maintenance periods.
Moreover, not all banks are required to maintain reserves of
agreement to the contemporary accounting system.
Menorinstitute - tuition fees can be exempted
completely only having to maintain reservations -4.0 -46
quarterly against average deposits in a week
-6.0 L...I....L.......................L..,,1...L...L..,,1..J...1...,L...,_.L..L.""--'L...L..................-69
from the previous quarterly period.
Imbalance, however, variability in the reserves
multi-purpose pliers have a reduced state due to the extension
Note: All data are in billions of dollars, not seasonally adjusted. Scaling
requirements for all institutions in 1980, approximately reflect each year's average ratio of transaction deposits
through the adoption of contemporary laws reserve to total reserves.

accounting in 1984, and for the elimination of the

reservation requirements against deposits not
transactional and passive in the late 1990s. As a result,
short-term changes in total reserves and transactions
deposits in money are more closely related
now that they were before. (See tables in this
page.) Toe in the hood of the reserve requirement
against transaction accounts above the range of
3 percent in April 1992 should also contribute to
Variability in the reserve multiplier
stabilize
38 1 Modern Moneythe multiplier, at least in theory.
Mechanics
137
 Although the bank should operate within the
system_where_totalAmount_of_reservations_is_rechecked
by the Federal Reserve, a response for policy action
We need to rectify individual toe bank.
let us know today what your reservation is exactly
positionwillser enloshora losproducto de de hoy
Loans are paid off Nilo makes sure of that.
When are new reserves being supplied to
banking system. reserve is distributed among thousands of
banks, and the individual banker cannot distinguish
among the entries that originate from the additions to the
reservations through the Federal Reserve action and shifts
transfers from another bank, it happens normally
business course.
To match short-term needs
available funds, therefore, many banks
borrow money to go into debt in the market to
cover deficits or lend temporary surpluses.
When demand for reservations is strong
supply disruption, funds acquired from money
market sources to cover deficits tend to
becoming more and more difficult to obtain, which, in
turn, may induce banks to adopt more restrictive
loan policies and therefore the interest rate
growthdeposit.
The open market operations of the
Federal Reserve exercises control over the creation of
deposits mainly through their impact on the
availability and cost of funds in the market of
money When the total amount of the offered reserves
banking system through open market
operations does not reach the required amount, some
banks are forced to borrow from the Federal
discount reserved window. because such a loan is
restricted for small periods, they will need
to reimburse it tends to lead to the restriction of
a greater expansion of deposits by the
lending bank. On the contrary, when there are
excess reserves in the banking system, individual -
double bunk beds against easy and relatively cheap
to acquire reserves, and expansion in loans,
investments, and deposit your savings.

38ModernMoneyMechanics
1
The copies of this book
of work are
available in:
Public Bank of the Reserve
Federal Chicago
section ofemails834
Chicago, IL 60690-0834
[312] 322-5111

This post was written

originally by DorothyM.Nichols
in May 1961. The June review
prepared by Anne Marie in 1992
L.Gonczy

REVIEWED
O May
1968
September 1971
June 1975
October 1982
June 1992

February 1994 40M

Printed in the U.S.

@ Printed on recycled paper

PROHIBITION OF THE
Federal Reserve k
FROM CHICAGO