FRB definitions may add to the confusion. One view is that it is bank deposits, not loans, which create money. You walk into a bank, deposit $1000 cash, and get a checkbook worth $1000. How much money is there now in total? $2000 ($1000 checkbook and $1000 cash in the bank vault)? Not according to the FRB definition of M1. The $1000 checkbook counts, but not the bank’s cash! :smack: If someone comes into the bank and borrows $900, now there’s $1900 of M1.
But, again, there’s nothing magical about banks’ creating money. If I run up a bar tab and write Joe the Bartender a post-dated IOU for $100 and my credit is good enough that other townspeople will accept that IOU and pass it around for a few months until the date arrives, than that IOU smells just like money (though it won’t make its way into FRB statistics). Poof!
Generally I have a good idea of where people go off the rails in trying to discuss these issues. I have some small experience in the matter.
The rest of my post covers this.
They absolutely are creating “it” from nothing, when we’re referring to “it” as the M1.
To say that “the money isn’t there anymore” is not a helpful statement, regardless of what definition of “money” you’re using. If you’re referring to the M1, then they create the M1. If you’re referring to the base, well, the base doesn’t have to move. It genuinely does not have to go anywhere. (It probably will, but it’s not necessary. In many cases, the base will stay right there where it started.) You’re adding complications before you get the most basic scenario properly sorted out. You absolutely have to begin thinking about this by thinking about a single bank. One bank. Only after you get the single bank situation right can you start imagining the whole banking system.
To demonstrate that the monetary base does not have to move: If I buy a car with a loan, and the dealership uses the same bank that I use – a single bank – then the process looks like this: I get into debt 10,000 to the bank with the loan on my car. The bank gets into debt 10,000 with a new deposit entry for the dealership. The entire process for the bank can be summarized by a single ledger entry.
DEBIT New loan (asset)CREDIT New deposit (liability)The bank’s asset is the new loan that I owe to them. Their liability is their new deposit, their new “accounts payable”, their debt to the dealership, their promise to pay the dealership monetary base immediately when the dealership asks for it. But since in this example, we’re saying we bank at the same place, then the dealership isn’t going to do anything with it right away. They’ll just keep the money on deposit. The bank is the middleman in the process, both a borrower and a lender simultaneously.
The M1 includes demand deposits. This loan transaction increased the amount of deposit liabilities. Therefore this new loan created money, increased the M1. And yes, it was out of nothing. The monetary base did not have to move because we both use the same bank. In this case, they are NOT “lending money they actually have”. I discuss this at the end of the previous post. Once we get the single bank scenario sorted out, then we should quickly realize that the banking system as a whole works in an incredibly similar fashion.
Just as a deposit is a liability on a commercial bank’s books, the monetary base is a liability on the central bank’s books.
We can start by assuming that the bank has a bit over a trillion in assets, and a trillion in liabilities.
Now they want to buy another trillion in assets, let’s say, oh, a mixture of Treasuries and MBS. So what they do is gobble up another trillion and then issue to the sellers another trillion of new monetary base.
DEBIT New MBS and Treasuries (assets)CREDIT New monetary base (“liability”)And the big categories on their new balance sheet now looks something like this:
And that right there is a trillion more in monetary base in the world. The big difference between the base and broader forms of money is that the base does not act like a liability in any real sense. The accountants call it a liability, but is it really? No, not by any of the properties we normally think of liabilities having.
In the olden days, newly created central bank money was a liability in the sense that it could be exchanged for gold or silver on demand, depending on the era. But this new base? No, can’t be exchanged for anything. Or something can be a liability if it earns a yield for its holder. But this new base? No, there’s no yield unless they voluntarily give it away (as they’ve started to do with excess reserves). Or something can be a liability if it’s got zero yield, as long as it’s constantly being rolled over, like short term Treasury debt, in order to offer the possibility that the yield might be higher in the future. But is the base rolled over? No, it is what it is. It’s perpetual, never having to be rolled over.
As far as the accounting goes, what a central bank does and what a commercial bank does are nigh indistinguishable. But the monetary base is truly a different kind of “money” from anything else. All those broader forms of money are, in fact, promises to pay monetary base. All of the broader forms of money are built on a promise to pay the base, but the base isn’t a promise to pay anything. It just exists.
I disagree. I doubt anyone here misunderstands the idea that commercial banks can’t create their own monetary base.
But I think the language that has been developed to discuss these issues tends to be… unhelpful. It all looks like English, but there are dialects of different nuance here that muddy the discussion. That’s why in a lot of these threads, I spend 95% of my time trying to stress formal definitions. I hardly ever use the word “money” by itself, out of context. I’m always talking about the base, or about broader money. In discussions like these, it’s always, always necessary to specify.
Yes.
And that’s why the formal definitions are so important. There’s a difference between The World as it actually is, and The Language we use to describe it. There’s a difference between the genuine territory, and the printed map we use to navigate it. And the weird thing is, it’s completely possible for a person to completely understand the territory, without any error, and still get mixed up with the language. I don’t mean to pick on RickJay, but this was an interesting post in another thread:
Our internal understanding can be without error, but somehow the wrong word still comes out. Weird but human.
And this can work in the other direction. A statement from another poster might be completely 100% correct, but we believe we perceive error in their post because of our own linguistic baggage. Of course, the situation isn’t helped when the other person is still strutting around like he’s put on his big-boy britches for the first time. That precious attitude isn’t going to help communicate insight. But a puerile attitude is not equivalent to an error in our assertions. People can be precious, and yet still be strictly true in at least some of their statements.
Bank A receives a deposit of $1000 from Depositor. It lends out $900 to Borrower. Borrower deposits $900 in Bank B.
Could Bank A lend out that $900 again? No? Then in some real sense, that $900 is not there anymore.
Sure. If the whole world used a single bank, then the bank could perpetually lend money as long as the loaned money ended up in that bank. If we expand that to the banking system as a whole and we assume that money flows more or less evenly between banks then the banking system as a whole acts much like a single bank system would.
I get that. But that does not seem to be what LinusK is trying to say. Either that or he is hyperventilating about a very well understood phenomenon in banking as if it was some sort of ponzi scheme.
How do they issue monetary base? What form does it take? You seem to be saying that the central bank could effectively buy all the assets in the world.
There was at least one poster that thought the reserve requirement meant that $1000 in deposits could support $10,000 in loans.
Oh, I could quibble at the edges. I could nitpick here or there. But it’s only until the very end of the post, the very last paragraph, that he transgresses into outright error. (And even then, it’s not an error if read in a hyperliteral fashion.) If you read the post with some empathy and tolerance for the strange tone, then you can’t really find pure factual fault with any previous sentence. Yes, you’re right that banks need monetary base on hand to pay out when the loan is deposited at Bank B. But during the normal scheme of things, they have enough. They have plenty, either right in their vaults, or on Fed computers, or borrowable, or that can be raised if they sell a Treasury or ten.
Banks have a cushion. During normal times, liquidity is simply not a constraint of the banking system. If a bank gets a deposit of $1000, they’ll be willing to lend $1000. If they don’t get any deposit, they’ll still be willing to lend $1000. They have a cushion. And that is what Post 88 is about.
Yes, he believes in MMT which is a “Post-Keynesian” school. Some Post-Keynesians refer to certain aspects of finance as Ponzi finance. So yeah. That’s pretty much it. Think of it as “hyperventilating” if that works. MMT people often think there’s a grand macroeconomic significance to all this they they and their coreligionists understand. Fitting in with the strange undertone of the whole thing is the idea that we other poor benighted souls haven’t achieved the same glorious understanding.
The result is that the language problem I’m talking about works both ways. If you don’t speak in exactly the same terms he uses, he’ll assume you don’t know what you’re talking about.
Here is an example of him assuming that an assistant vice president of the KC Fed doesn’t understand what he’s talking about. Hell, maybe it’s true. The previous KC Fed president Hoenig was incompetent with monetary policy, and his successor doesn’t seem any better. But still, it’s a pretty tall charge to accuse them of not understanding the NIPA accounts. They used a language he wasn’t accustomed to, and his reaction was that they were ignorant. That is not a model for discourse that I would personally want to emulate.
They call up a bank. “Yo Bank”, they say. “I want me a $1000 Treasury. Hand it over!”
“Okay”, says the bank.
“Alright then. I’m gonna write a little note in my accounting book. This note says you have $1000 of monetary base in your account. Congratulations!”
“Okay”, says the bank.
And that’s how it works. The accounting from the Fed’s perspective:
DEBIT New asset purchasedCREDIT New “liability” created in the computer
…let’s say I invented an alchemy machine, the Hellalchemist 3000, and I could create as much gold as I wanted for cheap. Could I buy all the assets in the world?
No. No, I couldn’t.
Gold would go to zero before I got anywhere close to all the assets in the world. Monetary base is central bank gold. They can create as much of it as they want, but that doesn’t mean they can buy all assets everywhere. They would destroy the dollar before they got anywhere near all the assets in the US, let alone the world. This is related to the reason why monetary policy is still potent even after some people think it isn’t.
That’s regulation. Regulation is hard. People mess it up all the time.
A more basic fact is, does a bank need to pay out the green (or its electronic equivalent) when a new check for a loan is deposited at another bank? The answer is yes. People who are hazy on everything else still tend to understand that much.
Seems like a non-sequitur to me. Suppose the economy is growing: how does that change the problem of debt growing faster than the amount of money necessary to repay it?
Well, I’m happy to know I might score above average on a standardized test; but saddened to be compared to a pooping puppy.
FWIW, it looks like we agree that banks create money; loans precede deposits; and that the Econ 101/popular view of fractional reserve banking is (I’d use your words, if I weren’t so lazy) BS.
I’m curious if you agree that the amount owed to banks is always greater than the amount of money banks create, and if so, whether that inevitably leads to financial crises.
“Banks create money”? Sure, modern money is created by banks, but that doesn’t really tell us anything important. It’s superficial. The kind of money that central banks create is substantially different from what commercial banks create. I don’t even like calling a central bank a bank because its functions are so different. But that’s the dumb word I’m stuck with.
I don’t agree with this because it’s quite clearly wrong.
Loans never precede deposits. Loans and deposits are often created simultaneously, without one preceding the other. And on every single banking day, new deposits are created without any loans. I have a mathematical model right here on my computer of a free banking system where the outstanding amount of loans is fixed, but new deposits are continually created and destroyed. It’s not fully accurate, but it’s not intended to be. Instead, it demonstrates basic facts about the system in elegantly simple ways.
This model? I got it from a Post-Keynesian.
What you were probably trying to say is that “loans precede reserves”. That’s a three-word catchphrase that’s slightly more accurate. Still, it doesn’t quite get there. Better, but it remains an oversimplification. Banks need reserves in case a loan is deposited at a different institution. Best would be “New loans in the system precede new reserves in the system.” At that point, we’re getting to something that starts to ring with some real truth. The loans can happen first, and then if the system becomes liquidity constrained, the central bank can inject more.
BS is fine. Maybe not the word I’d use, but fine.
I think the conventional story should be stripped from every textbook. I don’t mind that it’s not true. Some untrue things are useful. This one is not useful. Unpardonable.
The total amount of money that commercial banks have created is a stock.
The amount that is paid to them in interest and returned principal over a time period is a flow.
I can look at a system of reservoirs connected by pipes and I can say that at any time, there will be no more than 100 gallons in the system. I can also say that over the course of a year, a million gallons will be pumped into the main reservoir. This is not a contradiction. The limited stock of 100 gallons can flow in and out many many times. A small stock can support an enormous flow if the heart beats fast enough.
When you say that the amount owed to commercial banks exceeds the amount of money that commercial banks create, that is almost certainly going to be true in any conceivable case. It just doesn’t mean anything. The same stock of money can circulate more than quickly enough to pay the bankers what they’re owed, even if oustanding debt remains stable. It is again a Post-Keynesian model that best demonstrates this very simple fact. But even more fundamentally, the money that’s issued by private banks is not the base of our system. The base is created by central banks, and that money is not created with debt in any necessary fashion. Conventionally it is. But convention is not necessity.
I can point to history, and the long decades when we had strong growth without financial crisis. I can point to other countries like Canada that have avoided financial crisis for even longer stretches.
It’s OK as long as the bank can meet the demand for capital. When the demand increases (eg when a bubble bursts) and the bank can’t meet the demand we end up having to bail them out. I guess I have a problem with bailing out banks.
No, because gold-denominated doesn’t mean sticky-priced.
Right now a barrel of oil is worth… about 2.37 grams of gold, looks like. And my last shopping trip might’ve cost me 0.9 grams of gold according to today’s prices. And so on. We could imagine a world where everything is gold denominated, and every sticker price indicates a certain mass of shiny metal. Now obviously, I’m going to be filthy rich if I get this alchemy machine up and running, but that’s only because there’s a lot of value for me to capture before the marginal utility of newly alchemied gold quickly declines to zero. Those sticker prices are all going to change, and they’re going to change damn fast.
On day one of the working alchemy machine, I’m able to buy a barrel of gold for 2.37 grams. On day twenty, I might create fifty metric fucktons of the metal and it wouldn’t get me a slice of bread by that time, because a loaf costs ten quadrillion metric fucktons. The denomination of the assets doesn’t matter, as long as the prices can change. My machine let loose without limitation will speedily hyperinflate gold into utter worthlessness, and it will do so regardless of what prices are gold-denominated and what aren’t.
The theory is hard. Extremely hard.
Another point where LinusK and I would likely agree is that “modern macro” utterly failed to be useful for the recent crisis. I know I personally wasn’t prepared for what happened. I think that now I have a decent idea of where I went wrong, but hell, maybe I still have my head stuck up my own ass. The thing is that the failure of one idea does not automatically validate the next new pet idea that comes around the corner. I actually do read a lot of this stuff, from as many different perspectives as possible. And some of the alternatives are nothing more than buzz words attached to a skilled marketing campaign. There’s no there there.
My own ideas could be wrong, but in that case, then the next idea has to do a better job than what I already have. It can’t be a step backward and only make sense by ignoring all that we’ve learned. The next good idea has to incorporate all that we know, and then add something special and new.
No, I never said that. Commercial banks create money by poofing (actually lending) it into existence. The Fed (a kind of bank) poofs (lends) monetary base into existence. Other banks (besides the Fed) can’t create monetary base, because the law forbids it.
There was a time, though, when they could. They created currency by printing banknotes.
OK, I misinterpreted what you were saying. So you are concerned about the normal financing mechanism? Are you proposing we abolish lending and the banking system? What are you proposing?
Okay, it’d be pretty easy to buy all the Treasuries… by destroying their value. The problem with buying all the Treasuries isn’t buying them. Buying them would be easy, it’s just the very act of buying them with so much new base would make them utterly worthless. Treasuries are a promise to pay future base, and future base would be worthless, so Treasuries would be worthless. The Fed could buy them all, but afterward there’d be no way to sell them again at a high enough price in order to remove all that base from the system.
It’s possible to buy all the Treasuries but it’s a one way move. Ain’t no coming back from there.
Macro. Macro is the public face of economics, but economics isn’t limited to macro.
And in macro there are no experiments. I can understand the majority of what’s going on, I can get nine out of ten important things right, and still be embarrassingly wrong about that one last issue until after the crisis hits and I see why I’m in error about that last deep point. And not to pat myself on the back too vigorously, but I believe that’s pretty much what happened.
There are two other elements that make modern macro a disaster. The first is the modeling element within academia. There’s a certain methodology that is widely used which isn’t necessarily the best methodology to understand this issue. It’s hard to discuss issues of expectations affecting the velocity of circulation with people who are methodologically monolingual, who simply don’t have the language to understand the monetary flows within the system. That means that even if some macro people are working in a world after the germ-theory has been discovered, it’s damn near impossible for them to convince anyone else of what they’ve found. One group is using microscopes, and the other group isn’t. There are sad simple reasons for this.
The second problem is the political element. Macro is too close to politics for people to think clearly. Politics makes people stupid. I don’t post much in political threads here because politics makes me stupid, too. I’m not immune. Hardly anyone is immune. So I can make a point about monetary offset – that one big thing I got wrong – and I can talk about it again and again and again, but the idea never seems to sink in. The discussion is too political. The discussion is too tribal. People wave their party flags too fiercely to slow down and think. Lots of people on the right don’t think seriously enough about the stickiness of wages and of outstanding debt, and lots of people on the left refuse to engage with the automatic feedback loops within the monetary system.
But the gears are turning, slow as they are. Nominal GDP is the main flow I concentrate on, and it’s no longer a shadow variable. If we have another downturn, it simply won’t be ignored like it was in 2008. People do learn, slowly but inevitably.
(For the sake of prolepsis: Every time I mention how easy it is to make an error in macro – and it is ludicrously easy – someone marketish steps forward to say that’s exactly why policymakers shouldn’t fuck with the system. There are infinitely many ways to get intervention wrong, but only a few ways to get it basically right, so we simply shouldn’t do anything at all. And I am highly sympathetic to this. It’s a good argument. But the people who bring it up always ignore two huge points:
First, there is no such thing as non-intervention with a central bank. Maybe that would be ideal, but that’s not what we have. There is no such thing as “doing nothing”. The central bank is always always doing something, especially when it looks like it’s doing nothing. When the political reality mandates action of some sort, then we should face up to that reality and always be concerned about trying to do the best action.
Second is that the costs of some mistakes are much larger than others. We have to ask ourselves what might have happened if Hoover had responded appropriately to the Great Depression. If he hadn’t retreated into his gold-protecting instincts, we might have never seen the New Deal happen… because it would never have been felt necessary. The policies that the political right hates most are almost always a response to the failures of the political right. Even among lefty academics, there is simply no defense for some of FDR’s policies. It’s just that the previous failure was so extreme that it produced an extreme backlash. If they really believe that leftist policies like this are so terrible, then this is one issue that they absolutely positively must get right, because if they fail on this, they will be quickly replaced. The fastest way to the soshulizm of their worst nightmares is for one of Their Team to be perceived as presiding over the initial failure. The other side will blame everything, not just the technical issue in money that went disastrously wrong. This is an utterly obvious political point, but it’s never internalized. They just don’t get it, and so they make the same stupid stupid mistake over and over.)
Well we have been able to idntify some cause and effect in economics haven’t we? I mean we might not be able to engage in double blind studies on the effect of monetary policy or fiscal policy in particular situations but isn’t that largely because this stuff is so multidimensional that its like trying to predict the tomorrow’s weather by using the obeservations from one weather station?
You make it sound like economists are almost to revolutionary new ideas.
Some economists point to the multidimensionality issue, and maybe it’s true to an extent, but largely I think that’s a cop-out people use to refuse to look at the evidence. The deeper problem is a lack of careful attention to economic history. Add to that a lack of intellectual flexibility due to ideological rigidity – and this is true of both the right and the left, with the right saying nothing needs to be done and the left recommending the wrong things.
It’s easy to see why people weren’t paying much attention. Macro was boring after Volcker. They thought they had the whole problem licked. We had decades of stability. It was the “Great Moderation”, as Bernanke and others described it. They had mastered the universe, so there was no more need for diligence on that score. People thought about other interesting things instead.
Whoops.
Economics is a science.
That does not mean economists are scientists.
In the Soviet Union, there are stories of quotas for nails. To meet their requirements as quickly as possible, workers would make a large multitude of tiny nails, which was easier but didn’t fit the need. When the quota was changed to a certain weight of nails, the workers created one huge massive nail. I can’t find a link to the original story, but even without that, the underlying concept is clear. This is often called Campbell’s Law, or in economics Goodhart’s Law. When a proxy is used for evaluation, then people game the system to achieve the proxy while completely neglecting the underlying ideal.
What do you want in a macroeconomist? Well hopefully, someone who understands the economy as a whole. But how do you measure understanding of the economy? There’s nothing direct. There’s no way to strike at the ideal. So for the purpose of making or breaking careers, something else is used. A proxy is used.
Math.
I’m not against the mathematical methodology, not at all. In the right contexts, it can wonderfully insightful and even beautiful. It can be useful. The ambiguity bleeds away, and there’s never any worry about people misunderstanding your meaning. When we write words, we risk talking ourselves into a logical contradiction without realizing it because words are so slippery. All of that can be avoided with equations. However…
This story has probably been better told by others, but there’s a certain methodology, “modern macro”, that was devised to be better integrated with the rest of economics. It was supposed to be a way to give good solid microfoundations to the macro project. There were some good motives for this. It gives a depth and cleverness to the model of human decision-making that was previously absent. But it’s also philosophically hollow, following a strict reductionism in a silly way. At its core, this reductionism is historically ignorant, factually wrong, and scientifically naive. Most of micro is built on the macro situation working. In a real sense, microeconomics is built on a macro foundation. But that doesn’t work with the math they like best, and their favorite mathy methodology is now the ideology of the thing. They plow ahead regardless.
I used to think the resulting modern macro models were useful, and actually I think that they remain useful in the right hands. But it turns out that that’s an unfortunately small minority of the group. The models aren’t idiot proof. They only make a strong case to people who are so familiar with the ideas that they know what the models are good for, and what they aren’t good for. This problem isn’t just limited to modern macro, either. If you read Krugman’s blog at the NYT, he talks a lot about the IS-LM model. This is an undergraduate model, normally used for teaching intermediate students. Krugman loves it, uses it all the time, says people get things wrong because they don’t understand IS-LM. Well, a thousand pardons to him, but I do understand the model, and I can tell you right now it’s devilishly hard to use it right unless you already know how to use it right. It’s not idiot proof, and that’s why I’m not a fan of IS-LM. I guess if you’re already a genius, then it will help clarify your thoughts, but for the rest of us, it’s just not good enough. I don’t even quite agree with the way he uses it. (I’m still in favor of teaching it, though, because if it’s taught right, it does a wonderful job of explaining just how ridiculously tough the problem is. Anyone who learns IS-LM by heart should immediately be looking for something better.)
So there’s where we are. Academic macroeconomists earn stature with a mathematical formalism that does not necessarily help them understand the economy. They don’t even realize it. They take the proxy for reality. They take their mathematical acumen for real-world expertise. The cognitive dissonance would be too great for them to believe otherwise, and we’re stuck with economists who believe all sorts of completely random things, including at least a couple examples – and I swear that I’m not making this up – that increasing the monetary base by buying Treasuries can lead to deflation. Increasing the size of the base can lower the inflation rate. “It’s counter-intuitive”, they claim. Well, yeah. Some parts of reality genuinely are counter-intuitive. But some counter-intuitive things are completely fucking stupid, and this is one of them.
The all-math meritocratic system doesn’t actually award genuine insight into the economy. We’re left with a science without any scientists. Or with insufficiently few.
Destroying food in a time of hunger.
The conservative arch-mistake, worse than any other, is the belief that fighting inflation that doesn’t exist is more important than helping the economy.
This isn’t just the US. It’s an international problem. It can happen anywhere economic conservatives are in power, for whatever the local spectrum of “conservative” is. They do this, and they kill growth in nominal GDP, and then the left takes over and blames their entire agenda. This is potentially just one mistake with monetary policy, but every single thing they accomplished gets rolled back in a massive wave of resentment against their entire agenda. I wouldn’t actually mind this if the leftist overreaction didn’t so often go overboard, like burning crops and slaughtering pigs while people in the city go hungry. There was really no excuse for that.
The conservative base isn’t going to learn. A while back, I was talking with a guy from the NFIB, the small-business lobby, and I was trying to get across the idea that “regulation” didn’t have to be an onerous thing. If they designed it right, they could short-circuit the excesses of the other side. I went through the cap-and-trade system that helped reduce acid rain. I was, like, see? A market-based system! Not government overreach, but each business deciding for themselves how best to respond to a reasonable environmental limitation. This stuff works great. He chewed on that thought for a few seconds. “Well”, he said, “I just don’t like government interfering.” And I had one of those internal sigh moments.
It’s not about the best policy for them. They don’t judge these things with cost-benefit analysis. It’s a heuristic. They shoot from their hip. They use their instincts. They think with their guts. And the problem, as always, is that their guts have shit for brains. The problem in econ is that even the academic stewards of conservative thought have the exact same kneejerk thoughtlessness today. Not all of them, of course, but too many.
Someone like Milton Friedman cut his teeth in the time when Old Keynesianism was dominant. He couldn’t afford to be so dogmatic. But he has no real successor. None of Friedman’s insights got passed along to the modern Chicago School. Too much of what’s left is math without context or understanding. The world of high finance eventually woke up to the fact that their elegant risk equations were totally worthless, but that’s a world where incentives matter (eventually). There’s not much incentive to get these things right when the referees of all the journals are insulated from the consequences of any errors they might have about the real world. Avoiding this kind of error is not how they get nice positions, not how they get tenure.
There’s an irony here. Economics itself suggests that the primary motivation of most economists is not to learn real economics.
FRB definitions may add to the confusion. One view is that it is bank deposits, not loans, which create money. You walk into a bank, deposit $1000 cash, and get a checkbook worth $1000. How much money is there now in total? $2000 ($1000 checkbook and $1000 cash in the bank vault)? Not according to the FRB definition of M1. The $1000 checkbook counts, but not the bank’s cash! :smack: If someone comes into the bank and borrows $900, now there’s $1900 of M1.