Modern Money Mechanics: A Workbook on Bank Reserves and Deposit Expansion

This reprint presents Modern Money Mechanics as it was originally published by the Federal Reserve Bank of Chicago in editions ranging from 1961-1992. The last revision, made in 1992, was printed in a final edition in 1994 - reprinted here from PDF files. Available in electronic form on the Internet, MMM until now has been unavailable in hardcopy. As a description of our money system since the time of the creation of the Federal Reserve, hard money advocates, political libertarians and others have found the content of this book damning and used it as part of a general critique of fiat currency. This booklet has been cited by Gary North, Lew Rockwell, the U.S. and U.K. Libertarian parties and many others. It even features in YouTube videos. Modern Money Mechanics 2 What Is Money? 2 What Makes Money Valuable? 3 Who Creates Money? 3 What Iimits the Amount of Money Banks Can Create? 4 Where Do Bank Reserves Come From? 4 What Are Bank Reserves? 4 Bank Deposits-How They Expand or Contract 6 How the Multiple Expansion Process Works 6 Deposit Expansion 7 How Much Can Deposits Expand in the Banking System? 8 Expansion through Bank Investments 7 How Open Market Sales Reduce Bank Reserves and Deposits 12 Contraction Also Is a Cumulative Process 12 Deposit Contraction 12 Bank Reserves-How They Change 14 Factors Changing Reserve Balances-lndependent and Policy Actions 14 Changes in the Amount of Currency Held by the Public 16 When Currency Returns to Banks, Reserves Rise 17 Changes in US. Treasury Deposits in Federal Reserve Banks 18 Bank Reserves Decline as the Treasury's Deposits at the Reserve Banks Increase 18 Bank Reserves Rise as the Treasury's Deposits at the Reserve Banks Decline 19 Changes in Federal Reserve Float 20 A Decline in Fed Reserve Float Reduces Bank Reserves 20 An Increase in Federal Reserve Float Increases Bank Reserves 20 Changes in Service-Related Balances and Adjustments 21 An Increase in Required Clearing Balances Reduces Reserve Balances 22 Float Pricing As-Of Adjustments Reduce Reserve Balances 22 Changes in Loans to Depository Institutions 23 Discount Window as a Tool of Monetary Policy 24 Changes in Reserve Requirements 26 Reserve Requirements and Monetary Policy 26 Changes in Foreign-Related Factors 28 Foreign Exchange Intervention for the Federal Reserve's Own Account 28 Monthly Revaluation of Foreign Currency Assets 28 Foreign-Related Transactions for the Treasury 29 Transactions for Foreign Customers 32 Federal Reserve Actions Affecting Its Holdings of U.S. Government Securities 34 Miscellaneous Factors Affecting Bank Reserves 35 Treasury Currency Outstanding 35 Treasury Cash Holdings 35 Other Deposits in Reserve Banks 35 Nonfloat-Related Adjustments 35 Other Federal Reserve Accounts 35 The Reserve Multiplier -Why it Varies 36 Money Creation and Reserve Management 37 What Is Money?......Page 2 Who Creates Money?......Page 3 What Are Bank Reserves?......Page 4 How the Multiple Expansion Process Works......Page 6 Expansion through Bank Investments......Page 7 How Much Can Deposits Expand in the Banking System?......Page 8 Deposit Contraction......Page 12 Factors Changing Reserve Balances-lndependent and Policy Actions......Page 14 Changes in the Amount of Currency Held by the Public......Page 16 When Currency Returns to Banks, Reserves Rise......Page 17 Bank Reserves Decline as the Treasury's Deposits at the Reserve Banks Increase......Page 18 Bank Reserves Rise as the Treasury's Deposits at the Reserve Banks Decline......Page 19 An Increase in Federal Reserve Float Increases Bank Reserves......Page 20 Changes in Service-Related Balances and Adjustments......Page 21 Float Pricing As-Of Adjustments Reduce Reserve Balances......Page 22 Changes in Loans to Depository Institutions......Page 23 Discount Window as a Tool of Monetary Policy......Page 24 Reserve Requirements and Monetary Policy......Page 26 Monthly Revaluation of Foreign Currency Assets......Page 28 Foreign-Related Transactions for the Treasury......Page 29 Transactions for Foreign Customers......Page 32 Federal Reserve Actions Affecting Its Holdings of U.S. Government Securities......Page 34 Other Federal Reserve Accounts......Page 35 The Reserve Multiplier -Why it Varies......Page 36 Money Creation and Reserve Management......Page 37