Modern Money Mechanics

by the Federal Reserve Bank of Chicago

Modern Money Mechanics

A Workbook on Bank Reserves and Deposit Expansion

• Introduction

• What is Money?
• What Makes Money Valuable?
• Who Creates Money?
• What Limits the Amount of Money Banks Can Create?
• What Are Bank Reserves?
• Where Do Bank Reserves Come From?

• Bank Deposits—How They Expand or Contract

• How the Multiple Expansion Process Works
• Deposit Expansion

• How Much Can Deposits Expand in the Banking System?
• Expansion through Bank Investments
• How Open Market Sales Reduce bank Reserves and Deposits
• Contraction Also Is a Cumulative Process

• Deposit Contraction

• Bank Reserves—How They Change

• Independent Factors Versus Policy Action
• Factors Changing Reserve Balances—Independent and Policy Actions
• Changes in the Amount of Currency Held by the Public

• When Currency Returns to Banks, Reserves Rise

• Changes in U.S. Treasury Deposits in Federal Reserve Banks

• Bank Reserves Decline as the Treasury's Deposits at the Reserve Banks Increase
• Bank Reserves Rise as the Treasury's Deposits at the Reserve Banks Decline

• Changes in Federal Reserve Float

• An Increase in Federal Reserve Float Increases Bank Reserves
• A Decline in Federal Reserve Float Reduces Bank Reserves

• Changes in Service-Related Balances and Adjustments

• An Increase in Required Clearing Balances Reduces Reserve Balances

• Changes in Loans to Depository Institutions