Federal Reserve
Float Money Supply
The
smallest part of the money supply is called "float," which is the delay
between the deposit and clearing of payments between banks. For the
average person, it is evidenced in the time one writes a check to when the
funds are actually withdrawn from the checking account.
In essence float
causes the person who wrote the check and the person depositing the check
to both have the same money in their accounts, because the bank will
increase the depositor's account when the check is deposited, and yet the
money has not been withdrawn from the writer's account. However,
once the check "clears," meaning that there is enough money in the
writer's account, it is withdrawn from the other account.
Today float is
minimized due to the addition of electronic processing, but in the past
float could increase significantly when communication was disturbed due to
weather or other problems. The Federal Reserve had to use open
market operations to counter increasing float in those circumstances, but
today the impact of float is marginal.
On occasion, though,
float was also used for check kiting, which is a type of fraud.
However, e-checks and the Check Clearing for the 21st Century Act will
eventually eliminate this fraudulent act.
