 | This article possibly contains original research .(July 2012) |
Federal Reserve Deposits, also known as Federal Reserve Accounts, are deposits of gold or, later, Treasury Bills placed by United States banks with the Federal Reserve, the central bank. They are interchangeable with Federal Reserve Notes; both are forms of reserve balances and act as backing for the banks to create their own deposits in the form of loans to customers or to each other.
The Federal Reserve (Fed), when founded in 1913, [1] sought to integrate the individual banks in the United States. To this end, they prohibited private bank notes and limited banks to only creating deposits. In 1914, it was opened for business, it had an operating committee. [2] The banks could create deposits (as governed by their reserve ratio) backed by either gold or direct gold deposits at the Fed. [3] Because the Fed offered convertibility between gold and these gold deposits, and they provided the legal means for banks to expand deposits under the reserve ratio, many banks chose to deposit their gold with the Federal Reserve. The advantage of Federal Reserve Deposits over Federal Reserve Notes was that it greatly facilitated interbank lending and check-clearing. This was because Federal Reserve Deposits while being valid money did not exist in paper form, so they were easy to transfer from bank to bank.
These gold deposits would become known as Federal Reserve Deposits and quickly lost their 100% gold backing. During the Fed's inception, the Fed needed only to back gold deposits by 35%. This created a very dangerous situation because if more than 35% of banks demanded their Federal Reserve Deposits as gold, then the Fed would be insolvent. Such a crisis did happen in 1933 and Federal Reserve Deposits (as well as Federal Reserve Notes) lost their gold backing. Foreign governments were still allowed to be on the gold standard and their Federal Reserve Deposits were still redeemable in gold. But these too were only fractionally backed. This inevitably led to another gold run in 1971, led by heavy withdrawals by Switzerland (51 million) and France (191 million). Nixon chose instead of heavily devaluing the dollar against gold, to simply remove the US from the international gold standard.
As of July 2017, the Federal Reserve's balance sheet shows $2.5 trillion in Federal Reserve Deposits as opposed to $1.5 trillion in Federal Reserve Notes. [4] The largest holders of Federal Reserve Deposits are foreign governments, the Treasury, and mostly private banks in the US. Private citizens and companies are not allowed to hold Federal Reserve Deposits. Both Federal Reserve Deposits and Federal Reserve Notes are recorded as liabilities to the Fed. What the Fed has exchanged these deposits and notes for (gold and mostly t-bills) are recorded as assets to the Fed. To the private banks, the Federal Reserve Deposits are assets. Private banks do have the option to convert Federal Reserve Deposits into Federal Reserve Notes and vice versa, as needed to meet the demands of bank customers.
The following are typical accounting entries that help explain how Fed Funds function. A = Assets, E = Equity, and L = Liabilities
During the Fed's inception, the first significant transaction was that a bank would deposit their gold at the Fed. Figure a 1000 dollar deposit.
Private Bank Balance Sheet
L: Unchanged E: Unchanged A, Gold: -1000 A, Federal Reserve Deposits: +1000
Federal Reserve Balance Sheet
L: +1000 in Federal Reserve Deposits E: Unchanged A: +1000 in Gold
The Fed did not back Federal Reserve Deposits 100% with gold though. This is how they would have purchased a t-bill by watering the backing gold depositors.
Federal Reserve Balance Sheet
L: +1000 in Federal Reserve Deposits E: Unchanged A: +1000 in T-bills
Because the amount of deposits has increased, while the amount of gold assets have remained the same, gold deposits have been watered down. The bank that sold the t-bill to the Fed would then be credited with a corresponding 1000 Federal Reserve Deposit.
The modern day Fed does not really deal with gold, but the operations remain very similar. Say the Fed purchases 100k in t-bills from a primary dealer.
Federal Reserve Balance Sheet
L: +100k in Federal Reserve Deposits E: Unchanged A: +100k in T-bills
The primary dealer bank (only they are authorized to sell T-bills to the Fed) would record their sale as:
Private Bank Balance Sheet
L: Unchanged E: Unchanged A, T-bills: -100k A, Federal Reserve Deposits: +100k
Say a bank would like to trade 50k of Federal Reserve Deposits for Federal Reserve Notes. The Fed obliges by simply destroy one form of base money and creating another with no net effect on the monetary base:
Federal Reserve Balance Sheet
L, Federal Reserve Deposits: -50k in Federal Reserve Deposits L, Federal Reserve Notes: +50k in Federal Reserve Notes E: Unchanged—A: Unchanged
Private Bank Balance Sheet
L: Unchanged E: Unchanged A, Federal Reserve Notes: +50k A, Federal Reserve Deposits: -50k
Federal Reserve Deposits are frequently misunderstood even by politicians and economists. Below are some comparisons with popular monetary terms to illustrate what Federal Reserve Deposits are and are not.
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.
The monetary policy of the United States is the set of policies which the Federal Reserve follows to achieve its twin objectives of high employment and stable inflation.
In macroeconomics, money supply refers to the total volume of money held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits. Money supply data is recorded and published, usually by the national statistical agency or the central bank of the country. Empirical money supply measures are usually named M1, M2, M3, etc., according to how wide a definition of money they embrace. The precise definitions vary from country to country, in part depending on national financial institutional traditions.
A Federal Reserve Bank is a regional bank of the Federal Reserve System, the central banking system of the United States. There are twelve in total, one for each of the twelve Federal Reserve Districts that were created by the Federal Reserve Act of 1913. The banks are jointly responsible for implementing the monetary policy set forth by the Federal Open Market Committee, and are divided as follows:
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Money creation, or money issuance, is the process by which the money supply of a country, or an economic or monetary region, is increased. In most modern economies, money is created by both central banks and commercial banks. Money issued by central banks is a liability, typically called reserve deposits, and is only available for use by central bank account holders, which are generally large commercial banks and foreign central banks. Central banks can increase the quantity of reserve deposits directly, by making loans to account holders, purchasing assets from account holders, or by recording an asset, such as a deferred asset, and directly increasing liabilities. However, the majority of the money supply used by the public for conducting transactions is created by the commercial banking system in the form of commercial bank deposits. Bank loans issued by commercial banks expand the quantity of bank deposits.
Excess reserves are bank reserves held by a bank in excess of a reserve requirement for it set by a central bank.
Flow of funds accounts are a system of interrelated balance sheets for a nation, calculated periodically. There are two types of balance sheets: those showing
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment.
This is a list of historical rate actions by the United States Federal Open Market Committee (FOMC). The FOMC controls the supply of credit to banks and the sale of treasury securities.
The United States Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913.
The United States dollar is the official currency of the United States and several other countries. The Coinage Act of 1792 introduced the U.S. dollar at par with the Spanish silver dollar, divided it into 100 cents, and authorized the minting of coins denominated in dollars and cents. U.S. banknotes are issued in the form of Federal Reserve Notes, popularly called greenbacks due to their predominantly green color.
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The interbank lending market is a market in which banks lend funds to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate. A sharp decline in transaction volume in this market was a major contributing factor to the collapse of several financial institutions during the financial crisis of 2007–2008.
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