Federal Reserve
Federal Funds
The
Federal Reserve requires that banks keep a certain amount of money in
reserve, and this money is known as Federal Funds, which are stored at
Federal Reserve Banks. The Federal Reserve sets the interest rate on
the lending and borrowing of this money, which helps control
inflation. The lending process occurs between banks that have an
excess of money in their reserve accounts to banks that have a
deficit. Most of these loans are considered overnight loans.
The lending and borrowing of federal funds
creates a redistribution of money, but not an increase or decrease in the
total reserves. This allows for funds to earn returns rather than
just sit in the reserve accounts doing nothing. The benefits of the
funds being available for spending on immediate demand (known as "good
money"), the banks are able to borrow money from the Federal Reserve to
prevent overdrafts or meet their reserve requirements. The
availability federal funds is helpful, because checks and other monies
take time to clear and are not readily available for use.
For the everyday consumer, money supply
mostly consists of banknotes and coins, which are a large party of the
money supply, but not the entire supply itself. The money supply is
considered the amount of money used to buy goods, services, and securities
within an economy. Still, there is a difference even between coin
money supply and banknotes in relation to the Federal Reserve's ability to
control the money supply.
The Federal Reserve has little control over
coinage, because coins are created by the U.S. Mint, a division of the
U.S. Department of the Treasury. This means that Congress can create
legislation or the President can issue a legal mandate to increase or
decrease the amount of coinage in circulation. While it may seem
like this system would allow legislators to run amok with coinage and
usurp the role of the Federal Reserve Board, the coin base is really only
used as a complementary system to banknotes today.
Banknotes, while being complemented by
coinage, is controlled by the Federal Reserve. While the Bureau of
Engraving and Printing creates the paper money, the amount printed and
placed into circulation is controlled by the Federal Reserve System.
Banknotes are a symbol of the electronic credit-based money already in
existence. It is issued by private banks through fractional reserve
banking and replaces electronic funds on a one-to-one basis.
The amount of money outside of coinage can
only increase if the private banks put more money into circulation via
loans as dictated by Fractional Reserve Bank Lending Practices.
