Since banks are valued by the Fed, the central bank knows absolutely precisely the total amount of deposits in terms of money deposits at each bank, and it determines that the amount of a bank's loans equals the value of the assets and liabilities of the bank at any given time. But banks do not pay interest on deposits, and this means that they run a profit only by the use of borrowed funds; their total loans—after deducting credit card cash advances and other nonearning liabilities—must be paid off out of their deposits (and through their loan portfolios as well), if they are to liquidate their assets and fulfill their liabilities.
As to the money market, the accounting for it is even more exacting. Banks and other money institution fixed income investors—as well as institutions trading government debt itself—that need to buy short-term money must have their banks liquidate the money and turn it over to them. The flow of money through the money market mirrors that of banks' deposits.
By contrast, when a buyer of money seeks to sell the commodity she acquired, she creates money, in effect, by the act of currency sale. She converts money deposited in her banks and post office box into a claim on the government for a quantity of precious metal equivalent to the account balance to be transmitted to the seller. The entity to which she transmits her claim is not turned into money, however, until and unless the government issues an equivalent quantity of legal tender, in the form of bills or coins, to the credit of the buyer's account.
Although they count money market accounts as a major source of short-term funding for businesses, government agencies, and other entities, many economists do not comprehend the gravity of their role in modern finance. The movement of money from one pocket to another is so often the key to a whole cornucopia of activities, such as the stock exchange, the bond market, the commodity market, and commercial-paper markets. As so things the monetary expansion is the monetary depression, and vice versa. The cause of this folly, as with so many other things, lies with an utter lack of understanding of the economy and the requirement it imposes on the individuals and organizations that comprise the economy. d2c66b5586