Central Banks Don't Create Money.

[Pksimon2007]

They create settlement funds or, as they are called some places, reserves.

 

[Pksimon2007]

Let's forget about how banks create money right now, and look at how banks process money, because that process contains the tools needed to change a congressional appropriation into money.

If two banks want to accept checks drawn on deposit accounts of the other bank, they have to settle. The most primitive way to settle would be to send a courier between banks with cash every time one bank accepted the deposit of a check written on the other bank. This is called gross settlement - each transaction is settled individually.

The next step in efficiency is to net. They can wait to the end of the day, and settle the net amount of transactions with each other in one payment. That end of day payment would be far less than the sum of the payments for each individual transactions, so it requires the banks to handle and exchange far less cash than with gross settlement.

The second step in efficiency is to have each bank set up a deposit account at the other bank. When they net, rather than sending a courier with cash to settle, the deficit bank can simply credit the deposit account of the surplus bank. This requires no cash at all.

If we were to add many more banks to our universe of net settlements with deposits, every bank would have to have an account with every other bank. In order to make it more efficient, we can set up one central bank that only does business with banks, for the purposes of settlement. Every bank then needs only one account with the central bank, rather than with every other bank.

Since the central bank doesn't do business with anyone but banks, the types of deposits that banks maintain with the central bank don't even need to be the same kind of money as the deposits banks hold for their customers.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds, we are essentially using a different "currency" in our central banking operation than we are at the retail bank level.

In fact, since we are now netting transactions through a clearinghouse, the net of all transactions should always equal zero, so it is DESIRABLE to pass a law saying that banks cannot withdraw their balances from these settlement fund accounts at the central bank. To do so would create an imbalance in our settlement scorekeeping system.

Let;s call these settlement deposit accounts at the central bank "reserve accounts", and call the settlement funds which we swap back and forth between banks "reserves". We're going to call them that because there is no name we could give to them which would confuse people more.

So now we have twp systems: a retail banking system which is handling deposits which allow depositors to settle their accounts.

We also have a central banking system which is handling reserves, which allows banks to settle their interbank accounts.

The systems do the same thing, and are somewhat mirror images of each other.

We now have the tools we need to show how money is created by government.

 

[Pksimon2007]

When you write a check, there must be a deposit balance in your account which can be transferred to the payee's bank.

We can see now that the "transferring money" thing is sort of a fiction. The central bank is also involved in that transaction. When you write a check, there are actually four transactions, and no money moves anywhere. Scores are settled so that the banking system knows that you now have less money, and your payee has more, but money doesn't actually move anywhere.

Your bank actually destroys your deposit balance. It just erases it.

Your payee's bank simply creates a deposit for the payee. Out of nothing. It just creates it.

The accounting justification for each bank to do so is carried out by the central bank, which credits the payee bank's account with reserves, and debits your bank's reserve account.

Deposits are always liabilities of a bank, and we practice double-entry bookkeeping. So by reducing or increasing an asset (its reserve account at the central bank), the central bank is providing the accounting asset transaction which allows the banks to make the necessary liability account adjustments.

When you or I write a check, the ownership of "money" (our bank deposits) changes hands, and the ownership of reserves changes hands. The total quantity of money in the system remains unchanged. There is the same quantity of reserves, and the same quantity of bank deposits.

Now we get to the good part.

Congress appropriates money. It is not "requesting money from the Treasury", it is telling the Treasury to spend money.

Treasury doesn't have any money. It's all notional.

Treasury writes a check, which you take to your bank to deposit. Your bank dutifully credits your deposit account, and looks to the central bank to increase its reserve account balance.

But at this point, new money has been created. That new bank deposit IS the new money. The money was created politically, as a result of Congress appropriating it to be spent.

Now we need the accounting justification. There is no bank account on which the Treasury check was written, so the central bank will create reserves out of thin air to create a deposit balance in your bank's reserve account. Now the system is in balance. The central bank has enabled the creation of money, but it was the spending itself that created it.

We have a new bank deposit, which is money. We have new reserves, which are technically money, but will never see public circulation. As we have seen, they are settlement funds, stuck inside a deposit network which wholly exists between the central bank and its member banks.

 

[Pksimon2007]

But what about the Treasuries?

First, let's think about the logic. If we can create a Treasury security from scratch, how is it so difficult to believe that we can create a dollar from scratch?

If we can create one from nothing, we can create the other as well.

Treasuries bear interest, reserves (pre-QE) do not. If the central bank were to agree to accept reserves in exchange for Treasuries, then banks would always want to buy as many as they could, in order to convert non-interest-bearing reserves into interest-bearing Treasuries.

That we can understand, but why would government want to issue them and pay that interest?

Because of the interest rate. We have decided that the best way to have the central bank control inflation is through controlling interest rates.

The theory of the term structure suggests that control of one interest rate will, through arbitrage, control all interest rates.

So we need one interest rate that the central bank can control, but Congress doesn't allow the central bank to set the interest rates that banks can charge.

By offering Treasuries in exchange for reserves, the central bank is inducing banks to reduce their reserve holdings as much as they dare.

By setting a reserve requirement, the central bank forces the bank to have to have a certain quantity of reserves in their account. So banks are faced with decisions (or were, pre-QE), about how close to cut their reserve holdings to the reserve requirement. If banks were allowed to borrow reserves from each other, then they could cut those reserve balances a little closer to the bone, and make any shortfalls by borrowing from each other.

They would want to charge each other interest on those loans of reserves, and that would be an interest rate the central bank COULD control - the fed funds rate.

By buying or selling Treasuries in the repo market almost daily, the central bank could create shortages or excesses of reserves that would manipulate the fed funds rate to keep it at their target.

Now think about it practically.

When your bank accepted the deposit of your Treasury check, your bank was awarded 100% of the value of that check in reserves.

But it doesn't need all of those reserves. It needs 10% of them (usually), and would like to buy Treasuries with the rest.

Therefore, sales of Treasuries are going to match government spending well - but they don't ENABLE government spending, they are issued afterward (conceptually) to sop up the excess reserves created by government spending, so that the central bank can do its job of controlling interest rates.

 

[emilynghiem]

They create settlement funds or, as they are called some places, reserves.

Ithaca HOURS, Home, local currency started by Paul Glover
demonstrates how anyone can organize and issue their own currency legally
Paul Glover social entrepreneur
Whole towns have set up their own currency, organizing local businesses to exchange
notes or money coupons representing credits for labor hours

 

[Pksimon2007]

They create settlement funds or, as they are called some places, reserves.

Home started by Paul Glover
explains how anyone can organize and issue their own currency legally
Paul Glover social entrepreneur

- Why would somebody who claims to be a constitutionalist ignore Article 1 Section 8?

 

[emilynghiem]

They create settlement funds or, as they are called some places, reserves.

Home started by Paul Glover
explains how anyone can organize and issue their own currency legally
Paul Glover social entrepreneur

- Why would somebody who claims to be a constitutionalist ignore Article 1 Section 8?

By freedom of the press anyone is free to print their own currency that represents an agreed system of values or exchange.

No one is required to use the Federal Reserve system. It is private and the public is choosing to use it. if you want to run around and do things for free, or set up your own system of exchange, you can do so voluntarily just like the private investors did who created the Fed.

It is just as legal for people to exchange their own currency, as long as they follow certain laws.
Paying to federal govt requires using federal currency they recognize; so the same tax laws apply on exchanges using alternative currency: state taxes have to be paid to the state using currency or credit the state recognizes and federal taxes using currency or credit the federal govt recognizes.

So can anyone else exchange currency they agree to recognize.
We just can't FORCE people to accept that currency. It remains voluntary.

Right now the federal govt only recognizes federal reserve notes.
So if you want a different system, do the same thing the private investors did,
and set up your own. That's what I recommend, and have consulted with different groups
on how to do this logistically. Some people can set up their system by organizing labor pools and businesses to back the labor. The idea I want to pursue is backing credits that stand for millions in restitution owed to taxpayers for money misspent by corporate abuses and corruption of govt that the public did not authorize. So with the money we are already charged as debts, why not assess how much was Constitutional and legal or not, and then negotiate restitution and correction with cases where the wrongdoers can be tracked who misspent taxpayer money.
Assess the debts and damages, set up credit in an account similar to the Fed, and issue notes or credits to taxpayers that can be invested in programs and reforms/corrections we AGREE to fund. Where the debts are paid off over time by the wrongdoers, not the taxpayers.

We the taxpayers should go on strike and refuse to pay the costs, crimes, debts and damages for anything we deem to be unauthorized, unlawful, unconstitutional, or conflicts of interest in spending federal dollars.

 

[Toddsterpatriot]

Let's forget about how banks create money right now, and look at how banks process money, because that process contains the tools needed to change a congressional appropriation into money.

If two banks want to accept checks drawn on deposit accounts of the other bank, they have to settle. The most primitive way to settle would be to send a courier between banks with cash every time one bank accepted the deposit of a check written on the other bank. This is called gross settlement - each transaction is settled individually.

The next step in efficiency is to net. They can wait to the end of the day, and settle the net amount of transactions with each other in one payment. That end of day payment would be far less than the sum of the payments for each individual transactions, so it requires the banks to handle and exchange far less cash than with gross settlement.

The second step in efficiency is to have each bank set up a deposit account at the other bank. When they net, rather than sending a courier with cash to settle, the deficit bank can simply credit the deposit account of the surplus bank. This requires no cash at all.

If we were to add many more banks to our universe of net settlements with deposits, every bank would have to have an account with every other bank. In order to make it more efficient, we can set up one central bank that only does business with banks, for the purposes of settlement. Every bank then needs only one account with the central bank, rather than with every other bank.

Since the central bank doesn't do business with anyone but banks, the types of deposits that banks maintain with the central bank don't even need to be the same kind of money as the deposits banks hold for their customers.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds, we are essentially using a different "currency" in our central banking operation than we are at the retail bank level.

In fact, since we are now netting transactions through a clearinghouse, the net of all transactions should always equal zero, so it is DESIRABLE to pass a law saying that banks cannot withdraw their balances from these settlement fund accounts at the central bank. To do so would create an imbalance in our settlement scorekeeping system.

Let;s call these settlement deposit accounts at the central bank "reserve accounts", and call the settlement funds which we swap back and forth between banks "reserves". We're going to call them that because there is no name we could give to them which would confuse people more.

So now we have twp systems: a retail banking system which is handling deposits which allow depositors to settle their accounts.

We also have a central banking system which is handling reserves, which allows banks to settle their interbank accounts.

The systems do the same thing, and are somewhat mirror images of each other.

We now have the tools we need to show how money is created by government.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds,

Except when banks take deposits or clear checks.

 

[Pksimon2007]

Let's forget about how banks create money right now, and look at how banks process money, because that process contains the tools needed to change a congressional appropriation into money.

If two banks want to accept checks drawn on deposit accounts of the other bank, they have to settle. The most primitive way to settle would be to send a courier between banks with cash every time one bank accepted the deposit of a check written on the other bank. This is called gross settlement - each transaction is settled individually.

The next step in efficiency is to net. They can wait to the end of the day, and settle the net amount of transactions with each other in one payment. That end of day payment would be far less than the sum of the payments for each individual transactions, so it requires the banks to handle and exchange far less cash than with gross settlement.

The second step in efficiency is to have each bank set up a deposit account at the other bank. When they net, rather than sending a courier with cash to settle, the deficit bank can simply credit the deposit account of the surplus bank. This requires no cash at all.

If we were to add many more banks to our universe of net settlements with deposits, every bank would have to have an account with every other bank. In order to make it more efficient, we can set up one central bank that only does business with banks, for the purposes of settlement. Every bank then needs only one account with the central bank, rather than with every other bank.

Since the central bank doesn't do business with anyone but banks, the types of deposits that banks maintain with the central bank don't even need to be the same kind of money as the deposits banks hold for their customers.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds, we are essentially using a different "currency" in our central banking operation than we are at the retail bank level.

In fact, since we are now netting transactions through a clearinghouse, the net of all transactions should always equal zero, so it is DESIRABLE to pass a law saying that banks cannot withdraw their balances from these settlement fund accounts at the central bank. To do so would create an imbalance in our settlement scorekeeping system.

Let;s call these settlement deposit accounts at the central bank "reserve accounts", and call the settlement funds which we swap back and forth between banks "reserves". We're going to call them that because there is no name we could give to them which would confuse people more.

So now we have twp systems: a retail banking system which is handling deposits which allow depositors to settle their accounts.

We also have a central banking system which is handling reserves, which allows banks to settle their interbank accounts.

The systems do the same thing, and are somewhat mirror images of each other.

We now have the tools we need to show how money is created by government.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds,

Except when banks take deposits or clear checks.

- No. It's explained above.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits.

 

[Toddsterpatriot]

Let's forget about how banks create money right now, and look at how banks process money, because that process contains the tools needed to change a congressional appropriation into money.

If two banks want to accept checks drawn on deposit accounts of the other bank, they have to settle. The most primitive way to settle would be to send a courier between banks with cash every time one bank accepted the deposit of a check written on the other bank. This is called gross settlement - each transaction is settled individually.

The next step in efficiency is to net. They can wait to the end of the day, and settle the net amount of transactions with each other in one payment. That end of day payment would be far less than the sum of the payments for each individual transactions, so it requires the banks to handle and exchange far less cash than with gross settlement.

The second step in efficiency is to have each bank set up a deposit account at the other bank. When they net, rather than sending a courier with cash to settle, the deficit bank can simply credit the deposit account of the surplus bank. This requires no cash at all.

If we were to add many more banks to our universe of net settlements with deposits, every bank would have to have an account with every other bank. In order to make it more efficient, we can set up one central bank that only does business with banks, for the purposes of settlement. Every bank then needs only one account with the central bank, rather than with every other bank.

Since the central bank doesn't do business with anyone but banks, the types of deposits that banks maintain with the central bank don't even need to be the same kind of money as the deposits banks hold for their customers.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds, we are essentially using a different "currency" in our central banking operation than we are at the retail bank level.

In fact, since we are now netting transactions through a clearinghouse, the net of all transactions should always equal zero, so it is DESIRABLE to pass a law saying that banks cannot withdraw their balances from these settlement fund accounts at the central bank. To do so would create an imbalance in our settlement scorekeeping system.

Let;s call these settlement deposit accounts at the central bank "reserve accounts", and call the settlement funds which we swap back and forth between banks "reserves". We're going to call them that because there is no name we could give to them which would confuse people more.

So now we have twp systems: a retail banking system which is handling deposits which allow depositors to settle their accounts.

We also have a central banking system which is handling reserves, which allows banks to settle their interbank accounts.

The systems do the same thing, and are somewhat mirror images of each other.

We now have the tools we need to show how money is created by government.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds,

Except when banks take deposits or clear checks.

- No. It's explained above.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits.

No. It's explained above.

Yeah, I'm still chuckling.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits

New bank opens with $10 Million in deposits.
How does their reserve balance get to the Fed?

 

[oldfart]

Let's forget about how banks create money right now, and look at how banks process money, because that process contains the tools needed to change a congressional appropriation into money.

If two banks want to accept checks drawn on deposit accounts of the other bank, they have to settle. The most primitive way to settle would be to send a courier between banks with cash every time one bank accepted the deposit of a check written on the other bank. This is called gross settlement - each transaction is settled individually.

The next step in efficiency is to net. They can wait to the end of the day, and settle the net amount of transactions with each other in one payment. That end of day payment would be far less than the sum of the payments for each individual transactions, so it requires the banks to handle and exchange far less cash than with gross settlement.

The second step in efficiency is to have each bank set up a deposit account at the other bank. When they net, rather than sending a courier with cash to settle, the deficit bank can simply credit the deposit account of the surplus bank. This requires no cash at all.

If we were to add many more banks to our universe of net settlements with deposits, every bank would have to have an account with every other bank. In order to make it more efficient, we can set up one central bank that only does business with banks, for the purposes of settlement. Every bank then needs only one account with the central bank, rather than with every other bank.

Since the central bank doesn't do business with anyone but banks, the types of deposits that banks maintain with the central bank don't even need to be the same kind of money as the deposits banks hold for their customers.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds, we are essentially using a different "currency" in our central banking operation than we are at the retail bank level.

In fact, since we are now netting transactions through a clearinghouse, the net of all transactions should always equal zero, so it is DESIRABLE to pass a law saying that banks cannot withdraw their balances from these settlement fund accounts at the central bank. To do so would create an imbalance in our settlement scorekeeping system.

Let;s call these settlement deposit accounts at the central bank "reserve accounts", and call the settlement funds which we swap back and forth between banks "reserves". We're going to call them that because there is no name we could give to them which would confuse people more.

So now we have twp systems: a retail banking system which is handling deposits which allow depositors to settle their accounts.

We also have a central banking system which is handling reserves, which allows banks to settle their interbank accounts.

The systems do the same thing, and are somewhat mirror images of each other.

We now have the tools we need to show how money is created by government.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds,

Except when banks take deposits or clear checks.

- No. It's explained above.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits.

No. It's explained above.

Yeah, I'm still chuckling.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits

New bank opens with $10 Million in deposits.
How does their reserve balance get to the Fed?

I like to think the reserves are transported there by porcine aviation or unicorns, but you and I know that a member of the Federal Reserve System must meet minimum capital requirements when it is chartered and only Fed deposits and vault cash count. Therefore the deposits at the Fed must precede accepting any deposits.

 

[Pksimon2007]

Let's forget about how banks create money right now, and look at how banks process money, because that process contains the tools needed to change a congressional appropriation into money.

If two banks want to accept checks drawn on deposit accounts of the other bank, they have to settle. The most primitive way to settle would be to send a courier between banks with cash every time one bank accepted the deposit of a check written on the other bank. This is called gross settlement - each transaction is settled individually.

The next step in efficiency is to net. They can wait to the end of the day, and settle the net amount of transactions with each other in one payment. That end of day payment would be far less than the sum of the payments for each individual transactions, so it requires the banks to handle and exchange far less cash than with gross settlement.

The second step in efficiency is to have each bank set up a deposit account at the other bank. When they net, rather than sending a courier with cash to settle, the deficit bank can simply credit the deposit account of the surplus bank. This requires no cash at all.

If we were to add many more banks to our universe of net settlements with deposits, every bank would have to have an account with every other bank. In order to make it more efficient, we can set up one central bank that only does business with banks, for the purposes of settlement. Every bank then needs only one account with the central bank, rather than with every other bank.

Since the central bank doesn't do business with anyone but banks, the types of deposits that banks maintain with the central bank don't even need to be the same kind of money as the deposits banks hold for their customers.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds, we are essentially using a different "currency" in our central banking operation than we are at the retail bank level.

In fact, since we are now netting transactions through a clearinghouse, the net of all transactions should always equal zero, so it is DESIRABLE to pass a law saying that banks cannot withdraw their balances from these settlement fund accounts at the central bank. To do so would create an imbalance in our settlement scorekeeping system.

Let;s call these settlement deposit accounts at the central bank "reserve accounts", and call the settlement funds which we swap back and forth between banks "reserves". We're going to call them that because there is no name we could give to them which would confuse people more.

So now we have twp systems: a retail banking system which is handling deposits which allow depositors to settle their accounts.

We also have a central banking system which is handling reserves, which allows banks to settle their interbank accounts.

The systems do the same thing, and are somewhat mirror images of each other.

We now have the tools we need to show how money is created by government.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds,

Except when banks take deposits or clear checks.

- No. It's explained above.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits.

No. It's explained above.

Yeah, I'm still chuckling.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits

New bank opens with $10 Million in deposits.
How does their reserve balance get to the Fed?

- How did they get $10 million in deposits?

- They have no reserve requirement at $10 million. They are in the zero tranche.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.

If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

I also indicated that banks can buy and sell stuff to the Fed, primarily Treasuries.

So in the extremely unlikely event that every deposit on Day 1 was in cash, the bank would buy Treasuries from a dealer and offer to buy reserves from the Fed.

 

[Pksimon2007]

Let's forget about how banks create money right now, and look at how banks process money, because that process contains the tools needed to change a congressional appropriation into money.

If two banks want to accept checks drawn on deposit accounts of the other bank, they have to settle. The most primitive way to settle would be to send a courier between banks with cash every time one bank accepted the deposit of a check written on the other bank. This is called gross settlement - each transaction is settled individually.

The next step in efficiency is to net. They can wait to the end of the day, and settle the net amount of transactions with each other in one payment. That end of day payment would be far less than the sum of the payments for each individual transactions, so it requires the banks to handle and exchange far less cash than with gross settlement.

The second step in efficiency is to have each bank set up a deposit account at the other bank. When they net, rather than sending a courier with cash to settle, the deficit bank can simply credit the deposit account of the surplus bank. This requires no cash at all.

If we were to add many more banks to our universe of net settlements with deposits, every bank would have to have an account with every other bank. In order to make it more efficient, we can set up one central bank that only does business with banks, for the purposes of settlement. Every bank then needs only one account with the central bank, rather than with every other bank.

Since the central bank doesn't do business with anyone but banks, the types of deposits that banks maintain with the central bank don't even need to be the same kind of money as the deposits banks hold for their customers.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds, we are essentially using a different "currency" in our central banking operation than we are at the retail bank level.

In fact, since we are now netting transactions through a clearinghouse, the net of all transactions should always equal zero, so it is DESIRABLE to pass a law saying that banks cannot withdraw their balances from these settlement fund accounts at the central bank. To do so would create an imbalance in our settlement scorekeeping system.

Let;s call these settlement deposit accounts at the central bank "reserve accounts", and call the settlement funds which we swap back and forth between banks "reserves". We're going to call them that because there is no name we could give to them which would confuse people more.

So now we have twp systems: a retail banking system which is handling deposits which allow depositors to settle their accounts.

We also have a central banking system which is handling reserves, which allows banks to settle their interbank accounts.

The systems do the same thing, and are somewhat mirror images of each other.

We now have the tools we need to show how money is created by government.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds,

Except when banks take deposits or clear checks.

- No. It's explained above.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits.

No. It's explained above.

Yeah, I'm still chuckling.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits

New bank opens with $10 Million in deposits.
How does their reserve balance get to the Fed?

I like to think the reserves are transported there by porcine aviation or unicorns, but you and I know that a member of the Federal Reserve System must meet minimum capital requirements when it is chartered and only Fed deposits and vault cash count. Therefore the deposits at the Fed must precede accepting any deposits.

- That's incorrect.

Reserves are not required on acceptance of a deposit, but must be maintained in arrears.

The "reserve maintenance period" is the backwards-looking window, usually two weeks, over which a bank must maintain a reserve balance to cover. My reserves today must be sufficient for the average value of my transaction accounts over the past two weeks.

It's done in arrears. Banks do not check to see if they have reserves when they accept your deposit. They worry about that two weeks later.

In fact, unless a bank accepts a cash deposit, the award of reserves by the Fed is simultaneous with the posting of the new deposit.

 

[Toddsterpatriot]

Let's forget about how banks create money right now, and look at how banks process money, because that process contains the tools needed to change a congressional appropriation into money.

If two banks want to accept checks drawn on deposit accounts of the other bank, they have to settle. The most primitive way to settle would be to send a courier between banks with cash every time one bank accepted the deposit of a check written on the other bank. This is called gross settlement - each transaction is settled individually.

The next step in efficiency is to net. They can wait to the end of the day, and settle the net amount of transactions with each other in one payment. That end of day payment would be far less than the sum of the payments for each individual transactions, so it requires the banks to handle and exchange far less cash than with gross settlement.

The second step in efficiency is to have each bank set up a deposit account at the other bank. When they net, rather than sending a courier with cash to settle, the deficit bank can simply credit the deposit account of the surplus bank. This requires no cash at all.

If we were to add many more banks to our universe of net settlements with deposits, every bank would have to have an account with every other bank. In order to make it more efficient, we can set up one central bank that only does business with banks, for the purposes of settlement. Every bank then needs only one account with the central bank, rather than with every other bank.

Since the central bank doesn't do business with anyone but banks, the types of deposits that banks maintain with the central bank don't even need to be the same kind of money as the deposits banks hold for their customers.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds, we are essentially using a different "currency" in our central banking operation than we are at the retail bank level.

In fact, since we are now netting transactions through a clearinghouse, the net of all transactions should always equal zero, so it is DESIRABLE to pass a law saying that banks cannot withdraw their balances from these settlement fund accounts at the central bank. To do so would create an imbalance in our settlement scorekeeping system.

Let;s call these settlement deposit accounts at the central bank "reserve accounts", and call the settlement funds which we swap back and forth between banks "reserves". We're going to call them that because there is no name we could give to them which would confuse people more.

So now we have twp systems: a retail banking system which is handling deposits which allow depositors to settle their accounts.

We also have a central banking system which is handling reserves, which allows banks to settle their interbank accounts.

The systems do the same thing, and are somewhat mirror images of each other.

We now have the tools we need to show how money is created by government.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds,

Except when banks take deposits or clear checks.

- No. It's explained above.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits.

No. It's explained above.

Yeah, I'm still chuckling.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits

New bank opens with $10 Million in deposits.
How does their reserve balance get to the Fed?

- How did they get $10 million in deposits?

- They have no reserve requirement at $10 million. They are in the zero tranche.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.

If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

I also indicated that banks can buy and sell stuff to the Fed, primarily Treasuries.

So in the extremely unlikely event that every deposit on Day 1 was in cash, the bank would buy Treasuries from a dealer and offer to buy reserves from the Fed.

How did they get $10 million in deposits?


These strange interest seeking creatures sometimes just drop them off.
They're called depositors. Sometimes they call them customers.


They have no reserve requirement at $10 million. They are in the zero tranche.

My mistake, it was $100 million in deposits.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.
If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

Receive reserves? What does that mean? Who gives them these reserves?

 

[Pksimon2007]

Let's forget about how banks create money right now, and look at how banks process money, because that process contains the tools needed to change a congressional appropriation into money.

If two banks want to accept checks drawn on deposit accounts of the other bank, they have to settle. The most primitive way to settle would be to send a courier between banks with cash every time one bank accepted the deposit of a check written on the other bank. This is called gross settlement - each transaction is settled individually.

The next step in efficiency is to net. They can wait to the end of the day, and settle the net amount of transactions with each other in one payment. That end of day payment would be far less than the sum of the payments for each individual transactions, so it requires the banks to handle and exchange far less cash than with gross settlement.

The second step in efficiency is to have each bank set up a deposit account at the other bank. When they net, rather than sending a courier with cash to settle, the deficit bank can simply credit the deposit account of the surplus bank. This requires no cash at all.

If we were to add many more banks to our universe of net settlements with deposits, every bank would have to have an account with every other bank. In order to make it more efficient, we can set up one central bank that only does business with banks, for the purposes of settlement. Every bank then needs only one account with the central bank, rather than with every other bank.

Since the central bank doesn't do business with anyone but banks, the types of deposits that banks maintain with the central bank don't even need to be the same kind of money as the deposits banks hold for their customers.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds, we are essentially using a different "currency" in our central banking operation than we are at the retail bank level.

In fact, since we are now netting transactions through a clearinghouse, the net of all transactions should always equal zero, so it is DESIRABLE to pass a law saying that banks cannot withdraw their balances from these settlement fund accounts at the central bank. To do so would create an imbalance in our settlement scorekeeping system.

Let;s call these settlement deposit accounts at the central bank "reserve accounts", and call the settlement funds which we swap back and forth between banks "reserves". We're going to call them that because there is no name we could give to them which would confuse people more.

So now we have twp systems: a retail banking system which is handling deposits which allow depositors to settle their accounts.

We also have a central banking system which is handling reserves, which allows banks to settle their interbank accounts.

The systems do the same thing, and are somewhat mirror images of each other.

We now have the tools we need to show how money is created by government.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds,

Except when banks take deposits or clear checks.

- No. It's explained above.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits.

No. It's explained above.

Yeah, I'm still chuckling.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits

New bank opens with $10 Million in deposits.
How does their reserve balance get to the Fed?

- How did they get $10 million in deposits?

- They have no reserve requirement at $10 million. They are in the zero tranche.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.

If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

I also indicated that banks can buy and sell stuff to the Fed, primarily Treasuries.

So in the extremely unlikely event that every deposit on Day 1 was in cash, the bank would buy Treasuries from a dealer and offer to buy reserves from the Fed.

How did they get $10 million in deposits?


These strange interest seeking creatures sometimes just drop them off.
They're called depositors. Sometimes they call them customers.


They have no reserve requirement at $10 million. They are in the zero tranche.

My mistake, it was $100 million in deposits.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.
If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

Receive reserves? What does that mean? Who gives them these reserves?

- Did you not read the OP?

If you accept a check as a deposit, that becomes a liability for you, the bank.

The bank on which it was drawn has to lose an asset, because they have to honor the check which was drawn on one of their accounts.

The Fed takes reserves out of their reserve account.

The Fed puts them in yours.

That's how the banking system keeps score, to simulate transfers of money between depositors when they write checks to each other.

When the bank accepts the deposit, the Fed gives the bank reserves in the amount of the deposit.

 

[Pksimon2007]

Let's forget about how banks create money right now, and look at how banks process money, because that process contains the tools needed to change a congressional appropriation into money.

If two banks want to accept checks drawn on deposit accounts of the other bank, they have to settle. The most primitive way to settle would be to send a courier between banks with cash every time one bank accepted the deposit of a check written on the other bank. This is called gross settlement - each transaction is settled individually.

The next step in efficiency is to net. They can wait to the end of the day, and settle the net amount of transactions with each other in one payment. That end of day payment would be far less than the sum of the payments for each individual transactions, so it requires the banks to handle and exchange far less cash than with gross settlement.

The second step in efficiency is to have each bank set up a deposit account at the other bank. When they net, rather than sending a courier with cash to settle, the deficit bank can simply credit the deposit account of the surplus bank. This requires no cash at all.

If we were to add many more banks to our universe of net settlements with deposits, every bank would have to have an account with every other bank. In order to make it more efficient, we can set up one central bank that only does business with banks, for the purposes of settlement. Every bank then needs only one account with the central bank, rather than with every other bank.

Since the central bank doesn't do business with anyone but banks, the types of deposits that banks maintain with the central bank don't even need to be the same kind of money as the deposits banks hold for their customers.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds, we are essentially using a different "currency" in our central banking operation than we are at the retail bank level.

In fact, since we are now netting transactions through a clearinghouse, the net of all transactions should always equal zero, so it is DESIRABLE to pass a law saying that banks cannot withdraw their balances from these settlement fund accounts at the central bank. To do so would create an imbalance in our settlement scorekeeping system.

Let;s call these settlement deposit accounts at the central bank "reserve accounts", and call the settlement funds which we swap back and forth between banks "reserves". We're going to call them that because there is no name we could give to them which would confuse people more.

So now we have twp systems: a retail banking system which is handling deposits which allow depositors to settle their accounts.

We also have a central banking system which is handling reserves, which allows banks to settle their interbank accounts.

The systems do the same thing, and are somewhat mirror images of each other.

We now have the tools we need to show how money is created by government.

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds,

Except when banks take deposits or clear checks.

- No. It's explained above.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits.

No. It's explained above.

Yeah, I'm still chuckling.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits

New bank opens with $10 Million in deposits.
How does their reserve balance get to the Fed?

- How did they get $10 million in deposits?

- They have no reserve requirement at $10 million. They are in the zero tranche.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.

If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

I also indicated that banks can buy and sell stuff to the Fed, primarily Treasuries.

So in the extremely unlikely event that every deposit on Day 1 was in cash, the bank would buy Treasuries from a dealer and offer to buy reserves from the Fed.

How did they get $10 million in deposits?


These strange interest seeking creatures sometimes just drop them off.
They're called depositors. Sometimes they call them customers.


They have no reserve requirement at $10 million. They are in the zero tranche.

My mistake, it was $100 million in deposits.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.
If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

Receive reserves? What does that mean? Who gives them these reserves?

- It doesn't sound like you read my posts.

There's a lot of information there, presented simply.

It's not ideogical argument, it's an explanation of what reserves are, what reserves do, and where they come from.

If you have the intuition that they are anything like the common sense definition of reserves would lead you to think, then you're not familiar with the system.

Reserves serve no reserve function.

They are not money that is withheld from deposits, or salted away in case of emergency. They are nothing like that.

They are a completely different sort of electronic currency from anything we use, which only serve the purpose of allowing banks to clear payments with each other.

If you think of those WWII movies where some admiral in Hawaii has lackeys pushing around little wooden ships on a plexiglass-covered map to keep track of where the real ships are, you have a good picture of what reserves are.

They are little wooden money ships which keep track of where the real bank deposits are in the commercial banking system.

They're nothing more than that.

The term reserve is an archaic one, which represented something completely different in commodity money systems.

In many countries, what we call reserves are now called "settlement funds", which is far less confusing. Central bank reserves are not reserves in any sense that a businessperson or accountant would recognize them to be.

 

[Toddsterpatriot]

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds,

Except when banks take deposits or clear checks.

- No. It's explained above.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits.

No. It's explained above.

Yeah, I'm still chuckling.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits

New bank opens with $10 Million in deposits.
How does their reserve balance get to the Fed?

- How did they get $10 million in deposits?

- They have no reserve requirement at $10 million. They are in the zero tranche.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.

If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

I also indicated that banks can buy and sell stuff to the Fed, primarily Treasuries.

So in the extremely unlikely event that every deposit on Day 1 was in cash, the bank would buy Treasuries from a dealer and offer to buy reserves from the Fed.

How did they get $10 million in deposits?


These strange interest seeking creatures sometimes just drop them off.
They're called depositors. Sometimes they call them customers.


They have no reserve requirement at $10 million. They are in the zero tranche.

My mistake, it was $100 million in deposits.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.
If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

Receive reserves? What does that mean? Who gives them these reserves?

- Did you not read the OP?

If you accept a check as a deposit, that becomes a liability for you, the bank.

The bank on which it was drawn has to lose an asset, because they have to honor the check which was drawn on one of their accounts.

The Fed takes reserves out of their reserve account.

The Fed puts them in yours.

That's how the banking system keeps score, to simulate transfers of money between depositors when they write checks to each other.

When the bank accepts the deposit, the Fed gives the bank reserves in the amount of the deposit.

Did you not read the OP?

I did.

The Fed takes reserves out of their reserve account.

That's how it works now. Your idea was that banks would never touch their reserves.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits

Now you're saying my deposits impacted my bank's, and at least one other bank's, reserve balance at the Fed.

 

[Toddsterpatriot]

Since the two systems - the deposits at the central bank and the deposits at retail banks - should never have any reason to exchange funds,

Except when banks take deposits or clear checks.

- No. It's explained above.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits.

No. It's explained above.

Yeah, I'm still chuckling.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits

New bank opens with $10 Million in deposits.
How does their reserve balance get to the Fed?

- How did they get $10 million in deposits?

- They have no reserve requirement at $10 million. They are in the zero tranche.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.

If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

I also indicated that banks can buy and sell stuff to the Fed, primarily Treasuries.

So in the extremely unlikely event that every deposit on Day 1 was in cash, the bank would buy Treasuries from a dealer and offer to buy reserves from the Fed.

How did they get $10 million in deposits?


These strange interest seeking creatures sometimes just drop them off.
They're called depositors. Sometimes they call them customers.


They have no reserve requirement at $10 million. They are in the zero tranche.

My mistake, it was $100 million in deposits.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.
If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

Receive reserves? What does that mean? Who gives them these reserves?

- It doesn't sound like you read my posts.

There's a lot of information there, presented simply.

It's not ideogical argument, it's an explanation of what reserves are, what reserves do, and where they come from.

If you have the intuition that they are anything like the common sense definition of reserves would lead you to think, then you're not familiar with the system.

Reserves serve no reserve function.

They are not money that is withheld from deposits, or salted away in case of emergency. They are nothing like that.

They are a completely different sort of electronic currency from anything we use, which only serve the purpose of allowing banks to clear payments with each other.

If you think of those WWII movies where some admiral in Hawaii has lackeys pushing around little wooden ships on a plexiglass-covered map to keep track of where the real ships are, you have a good picture of what reserves are.

They are little wooden money ships which keep track of where the real bank deposits are in the commercial banking system.

They're nothing more than that.

The term reserve is an archaic one, which represented something completely different in commodity money systems.

In many countries, what we call reserves are now called "settlement funds", which is far less confusing. Central bank reserves are not reserves in any sense that a businessperson or accountant would recognize them to be.

They are not money that is withheld from deposits, or salted away in case of emergency.

Back to my $100 million in deposits. The Fed is now holding $10 million.
How is that different than "withheld from deposits, or salted away in case of emergency"?

 

[Pksimon2007]

- No. It's explained above.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits.

No. It's explained above.

Yeah, I'm still chuckling.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits

New bank opens with $10 Million in deposits.
How does their reserve balance get to the Fed?

- How did they get $10 million in deposits?

- They have no reserve requirement at $10 million. They are in the zero tranche.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.

If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

I also indicated that banks can buy and sell stuff to the Fed, primarily Treasuries.

So in the extremely unlikely event that every deposit on Day 1 was in cash, the bank would buy Treasuries from a dealer and offer to buy reserves from the Fed.

How did they get $10 million in deposits?


These strange interest seeking creatures sometimes just drop them off.
They're called depositors. Sometimes they call them customers.


They have no reserve requirement at $10 million. They are in the zero tranche.

My mistake, it was $100 million in deposits.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.
If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

Receive reserves? What does that mean? Who gives them these reserves?

- Did you not read the OP?

If you accept a check as a deposit, that becomes a liability for you, the bank.

The bank on which it was drawn has to lose an asset, because they have to honor the check which was drawn on one of their accounts.

The Fed takes reserves out of their reserve account.

The Fed puts them in yours.

That's how the banking system keeps score, to simulate transfers of money between depositors when they write checks to each other.

When the bank accepts the deposit, the Fed gives the bank reserves in the amount of the deposit.

Did you not read the OP?

I did.

The Fed takes reserves out of their reserve account.

That's how it works now. Your idea was that banks would never touch their reserves.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits

Now you're saying my deposits impacted my bank's, and at least one other bank's, reserve balance at the Fed.

- Of course the transfer of the check impacts reserve balances, just like the movement of a real ship in the South Pacific causes the admiral's lackey to move the little wooden ship around on the map.

The point is that the commander in the South Pacific can't call back to CINCPAC and say "hey, I need another ship. Send me one of those little wooden ones your lackey pushes around. That'll scare the f**k out of the Japanese Navy".

 

[Pksimon2007]

- No. It's explained above.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits.

No. It's explained above.

Yeah, I'm still chuckling.

There is no exchange between any bank and the Fed, between bank deposits and central bank deposits

New bank opens with $10 Million in deposits.
How does their reserve balance get to the Fed?

- How did they get $10 million in deposits?

- They have no reserve requirement at $10 million. They are in the zero tranche.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.

If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

I also indicated that banks can buy and sell stuff to the Fed, primarily Treasuries.

So in the extremely unlikely event that every deposit on Day 1 was in cash, the bank would buy Treasuries from a dealer and offer to buy reserves from the Fed.

How did they get $10 million in deposits?


These strange interest seeking creatures sometimes just drop them off.
They're called depositors. Sometimes they call them customers.


They have no reserve requirement at $10 million. They are in the zero tranche.

My mistake, it was $100 million in deposits.

But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.
If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.

Receive reserves? What does that mean? Who gives them these reserves?

- It doesn't sound like you read my posts.

There's a lot of information there, presented simply.

It's not ideogical argument, it's an explanation of what reserves are, what reserves do, and where they come from.

If you have the intuition that they are anything like the common sense definition of reserves would lead you to think, then you're not familiar with the system.

Reserves serve no reserve function.

They are not money that is withheld from deposits, or salted away in case of emergency. They are nothing like that.

They are a completely different sort of electronic currency from anything we use, which only serve the purpose of allowing banks to clear payments with each other.

If you think of those WWII movies where some admiral in Hawaii has lackeys pushing around little wooden ships on a plexiglass-covered map to keep track of where the real ships are, you have a good picture of what reserves are.

They are little wooden money ships which keep track of where the real bank deposits are in the commercial banking system.

They're nothing more than that.

The term reserve is an archaic one, which represented something completely different in commodity money systems.

In many countries, what we call reserves are now called "settlement funds", which is far less confusing. Central bank reserves are not reserves in any sense that a businessperson or accountant would recognize them to be.

They are not money that is withheld from deposits, or salted away in case of emergency.

Back to my $100 million in deposits. The Fed is now holding $10 million.
How is that different than "withheld from deposits, or salted away in case of emergency"?

- Those reserves are not a subtraction from the deposit the bank received.

When a bank accepts a check deposit for $100, it creates a deposit balance (a bank liability) for the customer of $100.

It also receives a balance in its reserve account (an asset) of $100 from the Fed.

It now has $100 in deposits which it must reserve. But it received $100 in reserves, so the bank doesn't need to do anything. Those reserves aren't subtracted from the deposit. They are the asset which the bank receives for accepting the deposit.