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What is see here is mistake in interpretation. Banks do count and take into account check deposits made by customers while calculating their reserves. However, these checks do turn into cash when cleared.
They certainly hold their reserves in cash -- printed cash.
All depository institutions (commercial banks, savings institutions, credit unions, and foreign banking entities) are required to hold reserves against certain types of deposits that they report as liabilities on their balance sheets. The function of reserve requirements is described in the Federal Reserve publication, Purposes and Functions:
Depository institutions may hold their required reserves as:=>Vault cash =>Deposits at their regional Federal Reserve Bank
This is the reasons, central banks are known to print notes when they have to increase the supply.
It can be done by both.
The Federal Reserve orders new currency from the Bureau of Engraving and Printing
See, the supply of money can be increased by bond writing. If the Fed wants to increase the money supply, it buys government bonds and to pay for it, it will print currency
This will directly result in increase of money supply.
They first write bonds, and then Federal Reserve orders new currency from the Bureau of Engraving and Printing to actually pay for it.
I mean buying of bonds.
Yes, it buys bonds, not writes bond. Writing means issuing.
This is the basic of federal bond issues.http://www.investopedia.com/articles/basics/04/052104.asp
The issue of federal bonds, is known as Treasury bonds - T Bonds.
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