Notes & Sources

1.1Cash vs. ledger money

August 2026, seasonally adjusted. "Currency" means currency outside the US Treasury, the Federal Reserve Banks and bank vaults.

Source: Federal Reserve Board, H.6 Money Stock Measures. FRED series CURRSL and M2SL.

1.2Credit theory of money

Innes argued that money is credit: a record of debts between people, not a commodity.

A. Mitchell Innes, "What Is Money?", The Banking Law Journal, May 1913. Reprinted in L. Randall Wray (ed.), Credit and State Theories of Money, Edward Elgar, 2004.

1.3What backs the dollar

• Federal Reserve notes are not redeemable in gold, silver or any other commodity. Gold redemption ended January 30, 1934, when Section 16 of the Federal Reserve Act was amended. Silver redemption ended in the 1960s.
• Notes are "obligations of the United States", redeemable in "lawful money" (that is, other dollars) at the Treasury or any Federal Reserve Bank.
• Each Reserve Bank must pledge collateral at least equal to the notes it issues. The collateral is chiefly US Treasury, federal agency and government-sponsored enterprise securities.
• Treasury securities: "All these securities are backed by the full faith and credit of the United States government." No collateral is pledged.
• The Fed also holds agency mortgage-backed securities, about $1.90 trillion as of October 7, 2026. The underlying mortgages are secured by homes; the securities pay in dollars.
• Bank deposits: reserve requirements have been 0% since March 26, 2020.

Federal Reserve, "Is U.S. currency still backed by gold?". 12 U.S.C. §411; 12 U.S.C. §412. Federal Reserve, reserve requirements. Treasury securities: Bureau of the Fiscal Service. Fed MBS holdings: H.4.1, FRED series WSHOMCB.

2.1Limits on government spending

• Money can leave the Treasury only under appropriations made by law.
• The debt limit caps the total amount the Treasury may borrow. Congress sets it and can raise or suspend it.

US Constitution, Art. I, §9, cl. 7. Debt limit: 31 U.S.C. §3101.

2.2Limits on the Federal Reserve

• The Federal Reserve Act sets no maximum size for the Fed's balance sheet.
• The Fed may buy Treasury securities only "in the open market", not directly from the Treasury.

Federal Reserve Act §14(b), 12 U.S.C. §355. Current balance sheet: Federal Reserve H.4.1 release.

2.3Limits on banks

• Capital rules require minimum equity against assets (details in Part 2).
• The reserve requirement has been 0% since March 26, 2020.
• Lending also depends on demand from borrowers who qualify.

Reserve requirements: Federal Reserve, Regulation D. Capital rules: 12 CFR Part 3 (OCC), Part 217 (Fed), Part 324 (FDIC).

2.4The real limit: inflation

• By law, the Fed's goals are maximum employment, stable prices and moderate long-term interest rates. The first two are usually called the "dual mandate". The Fed defines stable prices as 2% inflation.
• When total spending outruns what the economy can produce, prices rise.

Federal Reserve Act §2A, 12 U.S.C. §225a.

4.1The unit and legal tender

• US money is "expressed in dollars, dimes or tenths, cents or hundreths, and mills or thousandths".
• US coins and currency are legal tender for "debts, public charges, taxes, and dues".

31 U.S.C. §5101; 31 U.S.C. §5103.

4.2Shops can refuse cash

• "Private businesses are free to develop their own policies on whether to accept cash" unless a state law says otherwise.

Federal Reserve FAQ.

4.3Views on why money has value

• State theory (chartalism): Georg Friedrich Knapp, The State Theory of Money (1905).
• Market origin: Carl Menger, "On the Origin of Money" (1892).

Named for reference; not linked.

5.1Who can bank at the Fed

• "Federal Reserve Banks provide financial services to banks and governmental entities only."

Federal Reserve FAQ.

5.2The Fed's balance sheet

• Liabilities include Federal Reserve notes, reserve balances and "U.S. Treasury, General Account".
• Main assets: US Treasury securities and mortgage-backed securities.

Federal Reserve H.4.1 release, published weekly.

6.1Rules on spending

• "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law."
• The Fed may buy Treasury securities "only in the open market", not directly from the Treasury.

US Constitution, Art. I, §9, cl. 7; 12 U.S.C. §355.

7.1Government deposits aren't counted as money

• M1 excludes deposits "held by depository institutions, the U.S. government, and foreign banks and official institutions".

Federal Reserve H.6 Money Stock Measures.

8.1The debt limit

• Congress caps the total amount the Treasury may borrow, and can raise or suspend the cap.

31 U.S.C. §3101.

8.2No direct borrowing from the Fed

• Fed purchases of Treasury securities are limited to the open market.

12 U.S.C. §355.

9.1Interest on reserves

• Interest on reserve balances is "an important tool for the Federal Reserve's conduct of monetary policy".

Federal Reserve.

9.2How bond purchases add reserves

• When the Fed buys a security, it credits the seller's bank's reserve account. Its assets and liabilities grow by the same amount.

New York Fed, Liberty Street Economics (2017).

10.1The Fed's goals

• "Maximum employment, stable prices, and moderate long-term interest rates."
• The FOMC judges 2% inflation, measured by the PCE price index, most consistent with its mandate.

12 U.S.C. §225a; FOMC Statement on Longer-Run Goals.

11.1Deposit insurance

• "FDIC deposit insurance covers $250,000 per depositor, per FDIC-insured bank, for each account ownership category."

FDIC.

11.2Settlement on the Fed's ledger

• A bank instructs its Reserve Bank to "debit funds from its own account and credit funds to the account of another participant". Settlement is "immediate, final, and irrevocable".

Federal Reserve, Fedwire Funds Service.

P2 1.1Bank of England

• "Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money."

Bank of England, Money creation in the modern economy, Quarterly Bulletin 2014 Q1.

P2 1.2No reserve requirement

• Reserve requirement ratios were reduced to zero percent effective March 26, 2020.

Federal Reserve.

P2 2.1Who charters banks

• The OCC "charters, regulates, and supervises all national banks". State banking departments charter state banks.

OCC.

P2 2.2Core banking functions

• "Receiving deposits; paying checks; or lending money." (The rule is written for special-purpose national banks.)

12 CFR 5.20(e)(1).

P2 2.3Deposit insurance factors

• Financial history and condition; capital; future earnings prospects; management; risk to the Deposit Insurance Fund; community convenience and needs; consistency with the Act.

12 U.S.C. §1816.

P2 2.4New banks

• "Tier 1 capital to assets leverage ratio of not less than 8 percent throughout the first three years of operation."

FDIC, Applying for Deposit Insurance.

P2 5.1Minimum ratios

• Common equity tier 1 4.5%, tier 1 6%, total capital 8%, leverage 4%.
• Capital conservation buffer 2.5%.

12 CFR 324.10; 12 CFR 324.11. The Fed (Part 217) and OCC (Part 3) rules match.

P2 5.2Risk weights

• 0% for exposures to the US government; 50% for qualifying first-lien residential mortgages; 100% for corporate exposures.

12 CFR 324.32.

P2 7.1CECL

• Banks "estimate lifetime expected credit losses" (FASB ASC 326).

FDIC, Credit Losses FAQs.

P2 7.2Nonaccrual

• Loans "in default for a period of 90 days or more" go on nonaccrual "unless the asset is both well secured and in the process of collection".

FFIEC Call Report instructions (glossary, June 2022).

P2 8.1Charge-off deadlines

• "Closed-end retail loans that become past due 120 cumulative days and open-end retail loans that become past due 180 cumulative days" are charged off.

FFIEC Uniform Retail Credit Classification and Account Management Policy, Federal Register, June 12, 2000.

P2 9.1Capital categories

• Well capitalized: leverage 5% or more. Adequately: 4% or more. Undercapitalized: below 4%. Significantly: below 3%. Critically: tangible equity 2% or less of total assets.

12 CFR 324.403.

P2 9.2When a bank fails

• "As the insurer of the bank's deposits, the FDIC pays insurance to the depositors up to the insurance limit."

FDIC.

P2 10.1Credit reports

• Charged-off accounts older than seven years may not be reported. The seven years start 180 days after the delinquency began.

15 U.S.C. §1681c.

P2 10.2Debt buyers

• "Buyers paid an average of 4.0 cents per dollar of debt face value."

FTC, The Structure and Practices of the Debt Buying Industry (2013).

P2 10.3Collection rules

• A collector is presumed to harass if it calls "more than seven times within seven consecutive days".
• "Debt collector" generally means someone collecting debts owed to another.

12 CFR 1006.14; 15 U.S.C. §1692a.

P2 10.4Cancelled debt and taxes

• Lenders file Form 1099-C for a canceled debt "of $600 or more".
• Cancelled debt is excluded from income in bankruptcy, or while insolvent up to the amount of insolvency.

IRS, Instructions for Forms 1099-A and 1099-C; 26 U.S.C. §108.