Mecanismos Modernos Del Dinero

Modern Money Mechanics

A Workbook on Bank Reserves and Deposit Expansion

Federal Reserve Bank of Chicago

Modern Money Mechanics
The purpose of this booklet is to desmmbe basic the process of money creation in a ~actional reserve" banking system. l7ze approach taken illustrates the changes in bank balance sheets that occur when deposits in banks change as a result of monetary action bythe Federal Reserve System -the central bank of the United States. The relationshipsshown are based on simplil5ring assumptions. For the sake of simplicity, the relationships are shown as if they were mechanical, but they are not, as is described later in the booklet. Thus, they should not be intwreted to imply a close and predictable relationship between a specific central bank transaction andthe quantity of money. The introductorypages contain a briefgeneral desm'ption of the characte*ics of money and how the US. money system works. m e illustrations in thefbllowing two sections describe two processes: fijirst, how bank akposits expand or contract in response to changes in the amount of reserves supplied by the centml bank; and second, how those reserves are afected by both FederalReserve actions and otherjizctm. A final section deals with some of the elements that modifi, at least i~the short Tun, the simple mechanical relationship between bank reserves and deposit money.
Money is such a routine part of everyday living that its existence and acceptance ordinarily are taken for granted. A user may sense that money must come into being either automatically as a result ofeconomic activity or as an outgrowth of some government operation. But just how this happens all too often remains a mystery.
What Is Money? I money is viewed simply as a tool used to facilitate f transactions, only those media that are readily accepted in exchange for goods, services, and other assets need to be considered. Many things -from stones to baseball cards -have served this monetary functionthrough the ages. Today, in the United States, money used in transactions is mainly of three kinds -currency (paper money and coins in the pockets and purses of the public); demand deposits (non-interest-bearingchecking accounts in banks); and other checkable deposits, such as negotiable order of withdrawal (NOW) accounts, at all depository institutions, including commercial and savings banks,savings and loan associations, and credit unions. Travelers checks also are included in the definition of transactions money. Since $1 in currency and $1 in checkable deposits are freely convertible into each other and both can be used directly for expenditures, they are money in equal degree. However, only the cash and balances held by the nonbank public are counted in the money supply. Deposits ofthe U.S. Treasury, depository institutions, foreign banks and official institutions, as well as vault cash in depository institutions are excluded. This transactions concept of money is the one designated as M1 in the Federal Reserve's money stock statistics. Broader concepts of money (M2 and M3) include M1 as well as certain other hancial assets (such as savings and time deposits at depositoryinstitutions and shares in money market mutual funds) which are relatively liquid but believed to represent principally investments to their holders rather than media of exchange. While funds can be shifted fairly easily between transaction balances and these other liquid assets, the moneycreation process takes place principally through transaction accounts. In the remainder of this booklet,"money" means MI. The distribution between the currency and deposit components of money depends largely on the preferences of the public. When a depositor cashes a check or makes a cash withdrawal through an automatic teller machine, he or she reduces the amount of deposits and increases the amount of currency held by the public. Conversely, when people have more currency than is needed, some is...