Fed Funds and Bank Money

Date: 2015-10-07; view: 447.

IOUs as Money

Money is the credit side of a balance sheet relation. Every dollar of credit is matched by an equal amount of debt. A bank loan creates a credit for the borrower in the form of a negotiable IOU (the deposit) and a matching debt (the obligation to repay the loan). For the bank, it creates an often illiquid asset (the loan contract) and an equal liability (the negotiable IOU).

The term money is sometimes used in reference to high quality debt instruments nearing maturity.However such near-money is seldom acceptable as a medium of exchange.Besides being inconvenient to the seller, the monetary value of near-money is not really known until sold in the marketplace.

When the Fed purchases a financial asset from the public, it credits the seller's bank with a deposit at the Fed, known as Fed funds. Banks can exchange Fed funds for Federal Reserve notes, and vice versa, on demand. In either form, these Fed IOUs are the most negotiable in the economy. This is because the private sector must surrender Fed funds in paying Federal taxes. Conversely the government pays in Fed funds when it spends.

Individuals usually pay taxes with bank money, i.e. a check against a bank deposit. However the bank must cover the check with its own Fed funds. It cannot issue an IOU to cover the check. The Fed accepts bank money at par with its own IOUs. Thus bank deposits are nearly as negotiable in the private sector as Fed funds. Private party IOUs may be legally binding, but they are of uncertain monetary value and seldom negotiable. They are simply private debt rather than money.

(2401 symbols)

Vocabulary list:_________________________________________________

IOU – I owe you - Я вам должен (форма долговой расписки)

store of value - сбережения

negotiate – договариваться, обсуждать

retain – удерживать, сохранять

bond – облигация, долговое обязательство

unit of account – расчетная единица

balance sheet – балансовый отчет

near-money - субститут денег

negotiable [nɪ'gəuʃɪəbl] – оборотный, договорной

maturity - наставший срок платежа

matching debt – сбалансированный долг

illiquid asset – неликвидные активы

monetary value - денежная стоимость

equal liability [ˌlaɪə'bɪlətɪ] – равная ответственность

vice versa – наоборот