Introduction
If you believe that all dollars “are” money, I have a whole bag of dollars (about $165) that I will exchange for one $5 bill.
Bag of Money
I have used the image of shredded dollars to demonstrate that use determines what people do or do not use as “money.” The definitions of many other words depend on their use. Worms, for example.
If you dig in most fertile soil, you will find worms. People often add worms to compost heaps to aid the composting process. When asked to identify the squirmy critters, the composters will respond, “worms.” When you insert a fishing hook into the squirmy critters, they suddenly become “bait.”
In a similar manner peole do not (or cannot) use dollars held in reserve as “money.” To test this assumption, I will use two criteria to determine which ones people can use as “money.”
Commodity or claim on commodity
Common acceptance
Commodity in Circulation
People can use any commodity in circulation commonly accepted as a medium of indirect exchange as “money.”
Bills in Circulation
People can use bills and notes in circulation as claims, commonly accepted as a medium of indirect exchange, as “money.”
Transaction (demand) Accounts
People commonly use transaction (demand) accounts as media of indirect exchange, commonly accepted as “money.”
Deposits at The Federal Reserve or Cash in a Bank Vault
People cannot use deposits at The Federal Reserve or cash in bank vaults as a medium of indirect exchange or “money.” Reserves, wherever they exist, cannot satisfy either of our tests.
Commodity OR claim on commodity
The small word “OR” plays a critical role in this test. “Cash” at The Fed, in whatever form, cannot act as money and reserves at the same time.
Common acceptance
Accounts at The Fed do not meet the criteria for common acceptance. Federal Reserve regulations prohibit individuals from having accounts at The Fed. Banks cannot transfer their claims at The Fed to individuals.
Zero Reserve Requirements
The implementation of zero reserve requirements has confused the issue of whether The Fed creates “money.” We now have a system in which all monetary claims consist only of claims on claims on claims, but in no case do banks have claims on their accounts at The Fed that they can transfer to individuals. Simultaneously, bank balances at The Fed fail the test of common acceptance.
Conclusion
Never have dollar reserves at The Federal Reserve been used as “money.” For most of The Fed’s history, dollars held at The Fed by banks were disqualified because they could not act as reserves and money simultaneously. At the same time, those dollars failed to meet the criteria of common acceptance.
Currently, bank balances at The Fed do not qualify as “money” because banks cannot transfer these “assets” to anyone who is not a member of The Federal Reserve System.
Please stop misleading people into believing The Fed creates “money.”