Modern Money Mechanics (Illustrated): A Workbook on Bank Reserves and Deposit Expansion

by Federal Reserve Bank of Chicago

How does our current civilization use money? This is a digital reprint of the infamous Federal Reserve Bank of Chicago's Modern Money Mechanics Workbook which is frequently used 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.

The introductory pages contain a brief general description of the characteristics of money and how the U.S. money system works. The illustrations in the following two sections describe two processes: first, how bank deposits expand or contract in response to changes in the amount of reserves supplied by the central bank; and second, how those reserves are affected by both Federal Reserve actions and other factors. A final section deals with some of the elements that modify, at least in the short run, the simple mechanical relationship between bank reserves and deposit money. Money is such a routine part of everyday living that its existence and acceptance ordinarily are taken for granted. A user may sense that money must come into being either automatically as a result of economic activity or as an outgrowth of some government operation. But just how this happens all too often remains a mystery.

Genres: Economics, Business, Finance, Money

118 pages, Kindle Edition

First published January 30, 2009

Reviews

[Ayz · Rating 5 out of 5]

Open your eyes.

Things are not what they appear to be.

[Derek · Rating 4 out of 5]

This is a great read that will open your eyes to how our banking system actually works. This is fundamental, baseline knowledge that comes strait from the source. The best part is that it is written in a way that the average person can understand it without formal education in finance or economics.

[Paul-Gerrit · Rating 5 out of 5]

From the horses mouth. I have been wondering how the money is created and accounted for and this workbook is short and sweet.

[Merz · Rating 5 out of 5]

Excellent starting point for research about how money flows . All middle schoolers should read it .

[Tim Carlson · Rating 5 out of 5]

A good primer/review of fractional reserve banking.

[Povilas · Rating 5 out of 5]

Simply classics. Modern banking system at a glance (fractional reserve system, money multiplication etc.). Great introduction and highly highly recommended!

[Cagin Donmez · Rating 5 out of 5]

Introduction to fractional reserve banking. Super easy to grasp for a beginner.

[Carl Johnson · Rating 5 out of 5]

Modern Money Mechanics is THE classic explanation (in plain English) of both factional reserve banking in general and the role of the Federal Reserve in regulating the volume and volatility of money in the national economy of the United States. Readers should bear in mind, however, that the simple model presented is only intended to convey a basic idea of how money works or rather how money formerly worked. The rise of Commercial Paper (direct loans between Corporations) and Crypto Currencies (money based on manufactured scarcity, regulatory elusiveness, and anonymity), not to mention digital transactions of incomprehensible speed and complexity, render the model presented almost quaint in comparison to current reality.

[Dmitry · Rating 5 out of 5]

Очень хорошо про взаимодействие банков и ФРС, но мало, жаль, что это не учебник по экономике.

[WILLIAM F · Rating 3 out of 5]

Reads like stereo instructions.

[Alexander · Rating 3 out of 5]

Essentially, this is a criminal confession. Publication of this in centuries past would have led to bankers' heads being affixed to pikes. So much for progress.