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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
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Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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The following two quotes from the Encyclopedia Brittanica text

Resolved Question:

The following two quotes from the Encyclopedia Brittanica text seem to imply that the reserve requirement is not required to be physical printed money and a customer deposit made in check form can be used by a bank to increase its reserve requirement. Is this true? "Because loans give rise to new deposits, the potential money supply is, in this way, expanded or reduced." e.g., when the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn."
Submitted: 1 year ago.
Category: Finance
Expert:  Rakhi Vasavada replied 1 year ago.

Rakhi Vasavada :

Dear Friend,

Hello and welcome. Thank you for providing an opportunity to assist you.

Rakhi Vasavada :

Kindly remain online for a while as I prepare your reply.

Rakhi Vasavada :

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.

Rakhi Vasavada :

They certainly hold their reserves in cash -- printed cash.

Rakhi Vasavada :

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:

Rakhi Vasavada :

Depository institutions may hold their required reserves as:

=>Vault cash
=>Deposits at their regional Federal Reserve Bank

Customer : Ok. So in conclusion is the money supply ultimately limited to the amount of physical printed cash times the reserve ratio?
Rakhi Vasavada :

CERTAINLY.

Rakhi Vasavada :

This is the reasons, central banks are known to print notes when they have to increase the supply.

Customer : When you say print notes do you mean print money or write bonds?
Customer : Does the mint pro t money at the direction of Fed Reaerve System or by the Treasuries direction?
Rakhi Vasavada :

It can be done by both.

Rakhi Vasavada :

The Federal Reserve orders new currency from the Bureau of Engraving and Printing

Customer : Please elaborate
Rakhi Vasavada :

The Federal Reserve orders new currency from the Bureau of Engraving and Printing

Rakhi Vasavada :

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

Rakhi Vasavada :

This will directly result in increase of money supply.

Customer : When central banks print notes to I crease the supply, are they pronto g money theough the engraving folks or are they writing bonds?
Rakhi Vasavada :

They first write bonds, and then Federal Reserve orders new currency from the Bureau of Engraving and Printing to actually pay for it.

Customer : I didn't think the fed reserve wrote bonds.
Rakhi Vasavada :

I mean buying of bonds.

Customer : Just buy Nd sell treasuries as needed
Rakhi Vasavada :

Yes, it buys bonds, not writes bond. Writing means issuing.

Customer : Yes.
Rakhi Vasavada :

This is the basic of federal bond issues.

http://www.investopedia.com/articles/basics/04/052104.asp

Rakhi Vasavada :

The issue of federal bonds, is known as Treasury bonds - T Bonds.

Customer : ok. Getting back to my original question. . Deposits used as required reserves are actual physical cash?
Rakhi Vasavada :

YES

Customer : Ok. Thanks
Rakhi Vasavada :

You are most welcome.

Rakhi Vasavada :

Is there anything more I can assist you with ? Let me know if you need for assistance.

Customer : Any good stock tips?
Rakhi Vasavada :

for long term ?

Customer : Any thing
Rakhi Vasavada :

Ok.....

Rakhi Vasavada :

You can buy and hold stocks like AAPL Apple Inc, EDGW Edgewater Technology, MPEL Melco Crown Entertainment Limited, AEO American Eagle Outfitters, etc.

Rakhi Vasavada :

Anything more I can assist you with ?

Rakhi Vasavada :

Are you there ?

Rakhi Vasavada :

Anything more I can assist you with ?

Rakhi Vasavada :

Let me know if you need more help. Or else, kindly rate this positive so that we are compensated for assisting you.

Warm Regards,

Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 3868
Experience: Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
Rakhi Vasavada and other Finance Specialists are ready to help you
Expert:  Rakhi Vasavada replied 1 year ago.
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