Wednesday, November 19, 2014

Modern Money Mechanics, the Federal Reserve, and Banking

Staff Writer, Nathaniel Diaz
Money / Finance

The Federal Reserve Bank of Chicago published this workbook: MODERN MONEY MECHANICS, A Workbook on Bank Reserves and Deposit Expansion.

Here is how the Federal Reserve system defines what currency is, who is responsible, and everything in between.

The purpose of this booklet is to describe the basic process of money creation in a  "fractional reserve" banking system. The approach taken illustrates the changes in bank  balance sheets that occur when deposits in banks change as a result of monetary  action by the Federal Reserve System - the central bank of the United States. The  relationships shown are based on simplifying 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 interpreted to imply a close and  predictable relationship between a specific central bank transaction and the quantity of  money.

Source: Federal Reserve Bank of Chicago