The purpose of this booklet is 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 - 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 US money system works.
The illustrations in the following 2 sections describe 2 processes:
1. how bank deposits expand or contract in response to changes in the amount of reserves, supplied by the central bank;
2. how those reserves are affected by both Federal Reserve actions and other factors.
A final section deals with the elements that modify the simple mechanical relationship:
- between bank reserves and deposit money.
Copies of this workbook are available from Public Information Center, Federal Reserve Bank of Chicago
P.O. Box 834, Chicago. IL 60690-0834