What are Reserves and How do FRN & Coin Become M1 Money?

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By Alan Myers

“And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity (future), under the name of funding, is but swindling futurity on a large scale.”  Thomas Jefferson, in an 1816 letter to John Taylor.

  1. WHAT ARE BANK RESERVES?

            A bank’s reserves are nothing more than the “currency” or the items of barter used by a bank to settle its accounts with other banks.  That is to say, if bank A owes bank B, bank A will transfer the required amount of reserves to bank B.  That’s it.  Almost all of a bank’s reserves are mere electronic digits in an account maintained within the FED’s computerized accounting system.  When a bank acquires physical reserves (FRN or coin) from the FED, the FED will extinguish or decrease an equal amount of the bank’s electronic reserves.         

  1. HOW DOES A FRN BECOME M1 MONEY?

            Step 1 – Printing.  In the hands of the Bureau, FRN, or all that paper with green ink is just a print job.

            Step 2 – Delivered to the FED.  In the hand of the a FED Bank, FRN are neither money or reserves.  To the FED, each FRN only represents a printing expense.

            Step 3 – Delivered to a bank.  All FRN held by a bank are really just that portion of the bank’s reserves in physical form.

            Step 4 – Delivered to People.  Only in the hands of people do FRN become M1 Money.  This happens when a person accepts cash from a bank and in return, the bank extinguishes the same amount of M1ed (electronic digits in a checking account).

  1. HOW DOES COIN BECOME M1 MONEY?

            Step 1 – Minting.  The U.S. Mint mints all of our coins.

            Step 2 – Delivered to the FED.  In the hands of a FED Bank, coins are not money or reserves.  Coins held by the FED are simply treated as “Inventory”.  In exchange, the U.S. Treasury’s reserve account is increased by the face value of the coins delivered to the FED.  The U.S. Treasury’s bank account at the FED is a bank account of reserves and not M1 Money.

            Step 3 – Delivered to a bank.  In the hands of a bank, coins are that portion of the bank’s reserves in physical form.

            Step 4 –  Delivered to People.  Only in the hands of people do coins become M1 Money.  This happens when a person accepts coins from a bank and in return, the bank extinguishes the same amount of M1ed.

            The Take Away – Knowing each step in the process of how FRN and coins become M1 Money will help the reader understand how and when FRN and coins become M1 Money and when and why FRN and coins are not M1 Money.

Alan Myers is a San Diego CPA and forensic accountant.  For 8 years, he has dedicated himself to researching, studying and analyzing the Federal Reserve System, banking and the national debt.  He is a writer, speaker and radio commentator on these and other related topics.  You can contact Alan at: Alan Myers, CPA amcpa53@gmail.com


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