RBA money

In this section we are going to look at "central bank money". Sometimes this is referred to as "Reserve Bank money". When examining this subject, it is important to understand how Exchange Settlement accounts work.

exchange-settlement-accounts

The RBA distinguishes between commercial bank money (also called "commercial bank liabilities") and central bank money (also called "central bank liabilities") - on page 14 of the attached document entitled The Role of Settlement Accounts. The RBA states that the purpose of Exchange Settlement accounts is to settle obligations between commercial banks.

The banks have merely used central bank-issued money to settle the obligations between themselves.

 

Role of Exchange Settlement accounts

Whenever "commercial bank money" is electronically paid from a client account at Commercial Bank A to a client account at Commercial Bank B - an equivalent amount of "central bank money" has to be transferred from Exchange Settlement Account A to Exchange Settlement Account B. For a more detailed explanation - watch the videos "How money is created" on the right hand side.

If any commercial bank wants to increase its balance of "central bank money" - then it can do any of the following:

  • Borrow central bank money from the RBA.
  • Borrow central bank money from another commercial bank.
  • Entice a client from a different commercial bank to transfer their balance (which will result in the RBA making an equivalent transfer of central bank money across Exchange Settlement accounts).

When commercial banks lend "central bank money" to each other - this is called interbank lending. The term interbank market is used to describe the aggregate of all the commercial banks that deal in central bank money.

The use of central bank money

WebofDebt provides the following quote from Professor Scott Fullwiler, which explains that "central bank money" does not flow into the productive economy - but remains within the circle of Exchange Settlement accounts.

Banks can't "do" anything with all the extra reserve [i.e. Exchange Settlement] balances. Loans [by commercial banks to clients] create deposits - reserve balances [at the RBA] don't finance lending or add any "fuel" to the economy. Banks don't lend reserve balances except in the federal funds market [i.e. the interbank market], and in that case the Fed [in this case the RBA] always provides sufficient quantities to keep the federal funds rate [i.e. the cash rate] at its . . . interest rate target.

RBA-ES-balancesThe Annual Report of the RBA states that the average Exchange Settlement balances were $1.25 billion for the year 2011. This means that the RBA lent to the commercial banks on average $1.25 billion during 2011. As mentioned - none of this "central bank money" actually flows into the economy. This simple fact is never discussed in the media.

By now it should be obvious that the Reserve Bank of Australia does not create any digital money that is used in the economy. The commercial banks create all of the digital money that is used in the economy. As mentioned elsewhere - digital money makes up 96% of all money in the economy.

What the RBA does do is set the "cash rate" - as displayed in the graph as a red line. The cash rate is the interest rate that the RBA charges when it lends "central bank money" to the commercial banks. When the RBA sets the "cash rate" - it is setting the "monetary policy" of Australia.

 

In summary:
  • The RBA creates "central bank money".
  • The RBA lends "central bank money" to commercial banks.
  • "Central bank money" can only be deposited into Exchange Settlement accounts.
  • All Exchange Settlement accounts are held at the RBA.
  • "Central bank money" can only move between Exchange Settlement accounts.
  • Commercial banks can lend "central bank money" to other commercial banks.
  • The RBA makes payments across Exchange Settlement accounts.
  • Central bank money NEVER leaves this closed circle of accounts.
  • Central bank money NEVER makes its way into the economy.