1. Copyright ©2001, South-Western College Publishing Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition Chapter 14: Money and the Banking System

2. Carbaugh, Chap. 14 2 How the payments system works The Banking System Check processing systems: 1) Within a bank 2) Local clearinghouses 3) Correspondent banks 4) the Federal Reserve System's check collection network: A consumer in Albany, NY buys a painting from a gallery in Sacramento, CA. The buyer sends a check written on her account in an Albany bank. The gallery deposits the check in their account in a Sacramento bank. The Sacramento bank deposits the check for credit in its account at the FRB of San Francisco. The FRB of San Francisco sends the check to the FRB of New York for collection. The FRB of New York sends the buyer's check to her bank in Albany, which deducts the amount from her account there. The Albany bank tells the FRB of New York to deduct the amount of the check from its account. The FRB of New York pays FRB of San Francisco from its share in the inter-district settlement fund. FRB of San Francisco adds the amount to the Sacramento bank's account, and the gallery's account is increased.

3. Carbaugh, Chap. 14 3 Measuring the money supply Money Component$ billions% of total Currency460.142 Demand deposits376.734 Other checkable deposits247.223 Traveler's checks8.31 Total1,092.3100 The M1 measure of US money supply, December 1998 M1 = currency in the hands of the public + demand deposits + other checkable deposits + traveler's checks Source: Federal Reserve Bulletin, March 1999

4. Carbaugh, Chap. 14 4 The business of banking Banking AssetsLiabilities and net worth Reserves249.5Deposits3,321.0 Loans3,316.3 Checking deposits665.2 Commercial/industrial945.0Savings/time deposits2,655.8 Real estate1,323.9Borrowings984.7 Consumer503.7All other liabilities560.0 Other543.7Total liabilities4,865.7 Securities1,235.8Net worth (assets-liabilities)421.6 US Government792.9 Other442.9 All other assets485.7 Total assets5,287.3 Source: Federal Reserve Bulletin, March 1999 Consolidated balance sheet for all US commercial banks, December 1998 ($ bill.)

5. Carbaugh, Chap. 14 5 Process of money creation Money (a) Wells Fargo Bank AssetsLiabilities Required reserve =$100Checking deposits =$1,000 Loans =$900 (b) U.S. Bank AssetsLiabilities Required reserve =$90Checking deposits =$900 Loans =$810 (c) Rainier Bank AssetsLiabilities Required reserve =$81Checking deposits =$810 Loans =$729 Money multiplier = 1/required reserve ratio