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Art by u/HaajaHenrik
Memory Transcript Subject: Carlos Jose Rodriguez, Mechanical Engineer, Florida Man
Date [Standardized Human Time]: November 28, 2136
[Basic Medieval Music Plays on Speakers]
“We continue the adventures of Finn the Human boy and his quest to save the beautiful Princess Chalta! We meet our hero at the castle of terribleness, but he must tread carefully. Lest he face the wrath of the evil beast guarding the castle, behold Salisek! The great furred beast!”
Salisek quickly jumped out from behind the treehouse tree and gave the cutest growl I’ve ever heard, prompting a delightful giggle from the kids.
I love play time.
“Grr,” the terrifying beast said. “You come for the princess? Well than brave warrior, if you are so brave, come and face a true beast!”
Finn drew his sword… it was really a stick he found on the ground but who cares. “Move aside beast! I know how to use this! If you leave now, I will spare you, but you will never get in the way of me and my beloved Princess!”
Princess Chalta waved her handkerchief (a washed dishtowel), from the top of her tower (the old treehouse). “Save me brave Finn, the beautiful beast has captured me and placed me in this tower!”
Finn swiped his sword as the beast dodged and ducked. Salisek tackled the adventurer to the ground and proceeded to swipe at his face. Finn held on to his sword and swiped the beast’s side, causing her to miss. Before the beast could draw a second wind, Finn plunged the sword into her “heart”.
“Ahh, I have been bested! Curse you… brave… Finn…” Salisek the Beast was no more.
Finn limped up to the tree and held out his hand. “Princess Chalta the beast is dead! I have saved you!”
Chalta, using her magic wand (also a stick), escaped from the dreaded tower (she climbed down the stairs). “Brave adventurer, you have saved me. I am forever in your dept. By royal decree I pronounce you, Sir Finn, Protector of the Happy Kingdom! Alas, I only have one more thing to give, my hand.”
The princess reached out her hand, and the adventurer accepted. The two embraced in an adorable hug.
“AND THEY LIVED HAPPILY EVER AFTER!” We all yelled. Well… all except the parents who were watching the performance from the backyard. My narration clearly won them over as they gave us a standing ovation.
“Aww! So cute!” Talice said, giving a delightful tail motion indicating extreme affection.
“¡Una lindo princesa y su valiente caballero, AY QUÉ PRECIOSO!”, Mom said with a high pitched squeal.
“Oh, my brave baby knight!” Marleen was clapping ecstatically, clearly proud of her son’s performance.
Tarvik and Dad were sharing banter. “They were great weren’t they Dennis?” “Eh, the Narrator could use some work.”
Okay, I know he was joking but that still hurt.
We all laughed together until mom’s watch rang, indicating the food was done.
“Okay everyone time to eat!” Mom said, allowing us to go back for another wonderful family dinner.
We all sat at our respective seats with a small additional table for the kids. Mom decided to serve them first. I never questioned mother’s cooking but seeing her plate up the kid’s food made my blood boil… WHY THE HECK DO THEY GET NUGGETS! Wait… aw hell no, friggen DINO NUGGETS!
“Mommy, mommy! What are these? They have funny shapes,” said the Princess of the Happy Kingdom.
Her brave knight replied, “They’re dino nuggets! They’re shaped like dinosaurs.”
“What’s a dinosaur?”
Finn and I shared a collective gasp as he tried to explain Dinosaurs the best he could to Chalta. He named all the dinosaurs he knew; Pterodactyl, Brachiosaurus, Mosasaurus, Tyrannosaurus Rex (the best one), and Stegosaurus. He would even match up the dinosaur to the nugget he picked up.
“They were like- HUGE animals that lived a LONG time ago! They were so cool!”
The Venlil’s looked on in wonder.. In their time here they had been reading on Earth history and Science. One thing that they all agreed on was that Earth simply had more knowledge of everything other than practical medicine, and other advances in technology. One thing that really fascinated them, Tarvik especially, was the amount of information we had on wildlife and how nature worked.
Even thought Tarvik was an exterminator who had to learn about predators the Federations tempering made it nearly impossible to learn anything of value other than they eat meat. Many herbivorous creatures were even made into “predators” because of certain characteristics such as being aggressive or territorial. The knowledge of just how ignorant the Federation made him left him in a sour mood for a while. He constantly wondered how many creatures he set ablaze that simply didn’t need it.
After learning about how we handled dangerous animals, especially in Florida, he was starstruck. Not only had we lived with predators but tamed them into becoming our useful servants and family. Once he realized how little he knew he decided to do some “human research”.
Salisek and Talice also wanted to get into the lesson, but where would they start? They found that answer when we left the other day and found some of my old educational children’s books. Like many kids my age I loved animals, but one thing I loved most was dinosaurs. After they had done some snooping Tarvik found one of my old books and almost had a heart attack. I don’t know how that conversation when down, I can guess that seeing a large Arxur-like creature on steroids was probably not a good image to find.
It was probably funny though.
It was definitely funny.
Still, he had once again overcome his fear and did his best to learn all he could about Earth’s prehistoric wildlife. Hearing Finn name a bunch of facts instilled a feeling of wonder at the knowledge he was learning from an individual passionate on the subject, but also envious at how he wished he grew up, with books about actual nature instead of propaganda. Hearing Finn and Chalta talk about it instilled a sense of hope in all of us that it will be different.
“-and for a long time we thought they were related to lizards, but guess what!”
“What?”
“They’re actually related to birds and had hollow bones and feathers!”
“Really?! Could they fly?”
“Some of them did, but others used their feathers for insulation and hunted like most other animals. That is assuming they hunted.”
The kiddos were eating their Dino nuggets contently when I got a message on my phone… from Samuel.
“Hey mom, can I be excused? It’s urgent.”
My mother looked at me with concern. Usually, we don’t skip family meals, but she knew about my situation. Ever since dad told me about Samuel, I wasn’t sure what to think. Now that Vraka’s given me another chance I need to see what’s up.
Is he okay, why hasn’t he talked with me?
I got up from me seat and Chalta seemed to notice my mood.
“Big brother, are you okay? Is it about Samuel?” she asked, concern present in her voice.
Mom answered for me so I could take my leave. “Don’t worry my bebé, big brother just needs privacy right now.”
“Does he want a dino nugget? I got a ty-rhino saur-us rex.”
“Yes I would,” I said slickly yoinking the dino nugget out of Chalta’s claws before I went upstairs to my room. I closed the door and read the message in private.
Hey man, it’s been a while. A lot’s happened with me. I got a girl now! An Arxur as you could probably guess. You know Vraka and her sister Akara. They really like you. When you get the chance, can we talk? I can explain why I was silent for a while.
I took a deep breath and pressed the call button. It rang for a moment before picking up. I didn’t have a plan on what to say. What would be the plan? I decided to just wing it. He was technically still my friend after all.
“Hello?”
“Hey it’s Carlos. H-How are you?”
There was a pause before he continued. I could guess he was probably tense too. “Fine actually. I assumed you wanted an explanation.”
“Bro, I was worried about you! I assumed that after I left the Gator Land to work for Disney, which is the most Florida thing I’ve said all day, that we just lost touch. That was two years ago, what happened?”
Samuel took a deep breath before he responded. I had a feeling whatever he said next was gonna hit hard.
“About a month after you left my parents got in a car accident. They… didn’t make it.”
I was silent for longer than I probably should have been. I didn’t know what to say.
“Oh my God. Is that why you cut contact?”
“I was a wreck. I lost the only real family I had. My grandparents weren’t that close with us.”
“I remember. You said it had something to due with how your Catholic mom married your Jewish father? That’s what upset them right?”
I didn’t know the whole story but one time I was talking with his parents while they dropped off his lunch. We ended up on the topic of family and religion, that’s when they told me their situation. However, I could imagine they left certain private details out. It made sense, after all, it was sensitive family drama.
“Yeah, they where old traditional nut cases, at least I think they were. When they heard about the accident, they tried every day to check on me. I would say it was because I hated them, but that would be a lie. I knew for all their faults they still loved my parents… and me. I pushed them away because I was broken and scared of loving someone again. After that it was a downward spiral.”
“What else happened?”
“Without my parent’s income I lost the house. That is arguably my biggest regret. Sure, I don’t think I could have afforded the monthly payments anyway, but I still should have tried. I stopped showing up to work and eventually became homeless.”
“You were homeless! If my parents knew we would have taken you in no questions asked!”
“But that’s not the issue. Being homeless wasn’t a problem, it was a symptom of my problem. I could have called you, other friends, or even my grandparents. Instead, I just ran.”
I couldn’t believe what I was hearing. I never knew Samuel was going through so much all these years. Does that… make me a bad friend? Could I have done something differently?
“How long were you homeless?” I asked.
“About a month. I can’t really say why but one day I was just… sick and tired of everything. I was tired of being homeless, of being depressed, of being drunk, of letting my fear and anger control me, but most of all I was sick of living a life I KNOW my parents would never have wanted for me.”
I could hear Samuel tearing up through the phone. I also started to feel a lump in my throat as he continued speaking.
“I went back and contacted my grandparents. I don’t know think I would have stayed homeless much longer since I found out they were looking for me. They contacted police and everything. The look on their faces when I showed up on their doorstep is something I cherish even till this day. After that it was a matter of building myself up again. I started going to therapy and a special club for men like me trying to recover from alcohol abuse. Hell, I even started going to the gym.”
“Was it hard?”
What kind of question is that? Of course it was!
“Yeah. I talk like it happened in a day, but in reality, it happened over the course of a year. I got rehired at Disney of all places and slowly started rebuilding my income. I eventually worked my ass off, and I’m telling you I really did, to earn back my parents’ house. It helped since they left a small inheritance in their passing. It’s where I live now. Actually you also worked at Disney, how come we never saw each other?”
“I worked as an apprentice with a lot of their Imagineers in Lake Nona while I went to college. Still can’t believe they had that program.”
“I worked with the animals at the Animal Kingdom Resort before getting moved to Magic Kingdom.”
“That’s awesome man! I’m really happy that you were able to bounce back, but how did you meet Vraka?”
“After the bombings I decided I needed to get out their and make my parents proud. Helping people regain hope and seeing the light of day made me smile. I’ll admit though, Nazi space crocs where not at all on my list of reasons to go. Not to mention they always gave off a menacing vibe, but after some time I realized they’re not so bad. I even got friendly with a certain Arxur and even thought she was cute. She had this way of making me laugh, even if it was by accident, and she always had this odd personality. Like you know how cats pretend they don’t love you and act cold to show affection? Like that.”
“So, what you’re telling me is that Vraka is or was… as tsundere. Heh, like your favorite character in that Anime we use to watch as kids?”
“HA, I blame Asuka and Neon Genesis for my taste in women.”
We laughed together, taking in the much-needed humor before I asked him the question bugging my mind the most.
“So how did you two… you know…”
“Right, heh, so one day she was talking passionately about all the new things she’s learning about the different ways we cook our meat. She looked so cute I almost instinctually asked if I could pet her. I know it sounds rude, but she’s a sentient gator and I grew up in Florida, sue me! Anyways she must have taken it personally since she challenged me to a hunt of old. We would hunt prey until the day ended without weapons and I could pet her if I won. Now I don’t mean to brag, but I’ve been learning to hunt with my dad back in the day AND I’ve gotten a lot stronger since then. Now she said no weapons, but a rock isn’t a weapon. Even if it is, she still had an unfair advantage with her claws, so I call that balanced. Now I’m no MLB player but I could pitch back in high school.”
That was true, Samuel was known for his powerful throws, and since then he said he’s worked out so it might be stronger.
“Before the buck knew it, I threw the rock so hard and so accurately that it nailed him in the skull long enough for me to snap his neck.”
“Wait I’m sorry, did you say you HUNTED A DEER WITH A ROCK AND IT WORKED!?”
“Yup, and as it turns out Vraka didn’t do any better. She brought back a young white-tailed deer with a good couple scratches while the worst I got was mud on my hands from the rock. Since I won fair and square, she owed me my pets. She brought us to a private room, and I got to scratching. Turns out Arxur are so touched starved that a couple of scale scratches and belly rubs where enough to send her into heat, one thing led to another and…”
“You’re now the infamous Arxur Layer! You shall bring peace to the galaxy with the Excalibur in your pants!”
“You laugh but just ask Vraka, it was a one to six ratio.”
“Pftt, Jesus Christ!”
I started laughing so hard my sides started hurting. I hear Samuel dying on the other end too. Our collective wheezes filled the room with childlike noise not found since our childhood. We laughed until we couldn’t laugh anymore and once the room was quiet, I asked Samuel another question.
“Samuel, why did you never call?”
I could hear Samuel exhale, likely thinking about what to say next.
“The longer I was gone, the harder it was. I guess I was afraid of how you would react… if you’d care.”
“I do man, I missed you, and I’m glad to know you’re okay.”
“Thanks man. Hey, I heard you’re going to Magic Kingdom this weekend. For Chalta right? I should be working that day.”
“That’s awesome man! Maybe I’ll see you then, we’ll be eating Cinderellas Royal Table around two in the afternoon. We want to get early so Chalta can take pictures with Cinderella.”
“You know, I can get you a little something better.”
“What do you mean?”
“I’ll send you a number and tell them you know me and send the code, Princess Tea Party. Just trust me bro.”
I didn’t know what to think of this arrangement but what I did know was that Princess Tea Party sounded like something Chalta would love. However, given the nature of the name I was going to have to show her A LOT more princess movies.
“Alright man I’ll do it. We’ll talk some more later but I gotta get back to the family. Thank you for talking with me man, we’ll set up a boy’s night one of these days, okay?”
“Heck yeah man! I’ll see you around.”
I hung up and breathed a sigh of relief like no other. It was good to know Samuel and I were on good terms. Still, it was sad knowing all the things he went through. I knew his parents; they were good people. Making peace with his grandparents was a nice turn of events. I knew they were at odds but sometimes tragedy brings the best or worst out in us. I’m glad it was the former for him.
With a triumphant smile on my face I went down the stairs, only to find Chalta waiting for me outside my room with her hand stuck in… oh my God.
“Hello big brother!”
“Hello Chalta. Watcha’ got there?”
“A peanut butter jar.”
“That’s interesting, why is it stuck to your hand?”
“Well, mommy wanted Talice to try it and she gave some to me to try too. It was so tasty! I got a little carried away and stuck my whole hand in.”
“So why are you going up stairs?”
Tears started to flow in Chalta’s eyes as she started cry talking like kids do when they get into funny situations that seem scary to them.
“M-momma said you had t-tools. *sniff* A-And you kn-knew *sniff* what to do. P-Pwease big broder I don’t want a peanut budder for a hand!”
I took all my willpower not to laugh. This was so astronomically cute.
I carried the baby into my room where I keep a small selection of tools I used to use in case I had a home project. Scissors that are used to cut thin sheets of metal might work for plasic. I decided this would be better than a sharp knife and reduce the risk of hurting Chalta. After a minute, I was able to cut her hand out.
Chalta’s eyes widened, and a big toothy smile formed. “YAAAY! I don’t have a peanut butter hand anymore! Thanks, big brother! …I’m gonna lick my hand now.”
Chalta did in fact lick her peanut buttery hand and went back downstairs to rejoin the family dinner, practically skipping down the stairs while licking the consequences of her actions.
She’s so precious!
When I sat down at the dinner table mom plated my food for me.
“Here you go, me hijo.”
“Thanks mom!”
Mom handed me my plate and gave me a motherly kiss on my cheek. “Thank you! Chalta wouldn’t stop crying, also how did the talk go with Samuel.”
“Great actually and he says he has a surprise for Chalta.”
Chalta looked up from her peanut butter indulgence and focused all her attention on me.
“Surprise? Like what?” Chalta said with excitement and curiosity.
“I don’t know yet, but I promise this weekend we’re going to have so much fun!”
“Are we still going to see Cinderella?”
“Not just her, but tons of other things too! That’s why we’re going early. We got a whole day planned out.”
Chalta had a big smile on her face and was practically shaking with excitement. I also had a surprise up my sleeve, courtesy of dad who helped pitch in. Chalta has had a hard life, but this weekend will be the greatest weekend of her life.
Finn raised his hand like he was in a classroom. “Are we going too?”
Chalta was the one to answer this time, “Yes and Akara should all be going. We’ll all be in the same place!”
“Salisek, I know you’re fine with Vraka but are your parents okay with being around more Arxur than their use to?” I asked.
The Venlil couple looked at each other and intertwined their tails.
Talice spoke first, “We’ve talked with Salisek, we’ll be fine, if not a little shaky at first.”
That was good to know. Last thing we want is for Venlil to pass out when we promised the staff they wouldn’t. As much as their confidence left me skeptical, I could trust their judgment.
“I can’t wait to see all my friends and family together!” Chalta said.
I couldn’t wait either.
First Previous

For our schedule and links to other discussions, see the Money and Banking 2023 master post.
This is the discussion thread for Economics of Money and Banking Lecture 5: The Central Bank as a Clearinghouse.

• Lecture Videos
• Lecture Notes

The lecture begins our discussion of banking as a payments system. We start with the interconnectedness of bank balance sheets that allow the payment system to operate smoothly. The central bank helps knit the payment system together to approximate the behavior of one big bank. We cover correspondent banking and central bank cooperation.

Part 1: FT: Martin Wolf on QE3

• FT Article: Bernanke makes a historic choice

As the press release of the open market committee stated: “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.” This is also “consistent with its statutory mandate”, to foster “maximum employment and price stability”. —Bernanke makes a historic choice

• Here's the Money View blog post that examines QE3.

How should we understand QE3? The Fed promises to buy MBS, and possibly other assets, at a fixed and steady pace until employment improves. The immediate effect is to absorb such assets from elsewhere in the financial system. This is, in the first instance, a boost to the liquidity of these securities: when a big-time buyer is out there, it will be easier to sell, and knowing that a big-time buyer will continue to be out there, others will be more likely to buy. — QE3 The Money View

I've added "Builders" to the balance sheet from the blog post to show where the money goes and where the houses come from:
​
https://preview.redd.it/q8ui8v69o24b1.png?width=1133&format=png&auto=webp&s=c24e93eb8e763849022eada0aa4974edf9433170

At the highest level, finally, does QE3 get at what is keeping aggregate demand down? If the problem remains, still, overindebted households unwilling to increase their demand for newly produced goods and services, then this liquidity-providing operation will have very little effect. If there is too much debt out there, and it is to be reduced, someone will have to write that debt down against equity. This is not a feature of QE3 as announced. — QE3 The Money View

The goal was to return to nominal GDP trend, but we were falling further behind.

Part 2: One Big Bank

The payments system functions as if it were operating on the balance sheet of one big bank. Everyone can pay each other using bank deposits as if all bank deposits were equivalent.
The IMF works more like a "pure money" one-big-bank system. Its balance sheet does not expand or contract as countries make payments to one another.
In a "pure money" one-big-bank system, the quantity of money (deposits) doesn't change. Depositors pay each other by assignment, which appears as novation on the balance sheet of the bank: one deposit account takes on liabilities previously held by another:
​
https://preview.redd.it/7ifoequao24b1.png?width=847&format=png&auto=webp&s=21f2884c7dced3a3839116a8e10b37d0a6c556c1
The Fed works more like a credit system. A "pure credit" one-big-bank system has no reserves. Instead, surplus agents have deposits at the bank, which they hold as assets. Deficit agents have "overdrafts" at the bank, which are their liabilities.
https://preview.redd.it/uk0qf9bco24b1.png?width=268&format=png&auto=webp&s=d832d2aaddc01d60a136d952e481eee72e00d3b3
Depositors make payments through the bank. Below is the matrix from the lecture that shows whether the bank's balance sheet expands, contracts, or stays the same size. Payers are on the vertical axis. Payees are on the horizontal axis.
https://preview.redd.it/p1wimxoeo24b1.png?width=125&format=png&auto=webp&s=11760b09ddf1761033e5fdbbe923a48d1a7db085
Surplus agents pay each other by assigning deposits. Deficit agents pay each other by novating overdrafts. Deficit agents pay surplus agents by issuance, intermediated by the bank. Surplus agents pay deficit agents by set off, again intermediated by the bank.
This matrix assumes that the bank's balance sheet expands only when necessary. It shrinks whenever possible. Otherwise, everybody could make all payments by issuance, and balance sheets would only ever expand.
The Money Stock
In a footnote to the lecture notes, Perry points out that the elasticity of credit makes it hard to define the size of the money stock.

Note in passing that this way of thinking about the payments system raises deep questions about how properly to measure the money supply.
—Lecture Notes

He provides three options.

1. The sum of deposits.
2. The sum of deposits minus overdrafts.
3. The sum of deposits plus credit limits (the "minus" is a typo in the notes).

The first option is closest to how people usually think about the money supply. But in a world with the possibility for overdrafts, it doesn't measure agents' spending potential.
The second option also doesn't measure people's overall purchasing power. If you're in a pure credit system, deposits and overdrafts exactly net out to zero, but we know there's purchasing power in the system.
The third option reflects the idea that there's more gross purchasing power when people have higher credit limits. But credit limits don't appear on anyone's balance sheet. How do we measure them?
The balance sheets tell the same story regardless of how you define or measure the money stock.

Part 3: Multiple Banks, a challenge

In the real world, the challenge is to knit multiple bank balance sheets together into a single payment system. When deposits move through the banking system, there is a notional flow of reserves behind the scenes.
https://preview.redd.it/5fz7oyp1p24b1.png?width=558&format=png&auto=webp&s=f6baed3bb7fa55e9b9f3daa5da2c2d80a34178c9
Notice that reserves move (assignment) along with the deposits (novation). In quadruple-entry accounting, this is a transfer of portfolio. Bank A's balance sheet contracts on both sides while Bank B's balance sheet expandson both sides. In the example above, the consolidated balance sheet of the banking system as a whole remains the same size.
Unlike with one big bank, the reserves matter. The deficit bank can run out of reserves and come up against the settlement constraint. There's more discipline than in a system with one big bank.
Banks run the payments system by expanding and contracting their balance sheets on both sides. The net worth of neither the individual banks nor the banking system as a whole changes as depositors make payments to each other.
If banks refused to run the payment system, it would force depositors to withdraw cash whenever they wanted to make payments.
See the below set of balance sheets.
https://preview.redd.it/x1tai1fzo24b1.png?width=1200&format=png&auto=webp&s=0e320bcd0a430e9035a0a8a89e8cee2d82bfa465
There are two scenarios here: A and B. Each is a different way for Depositor α at Bank A to pay Depositor γ at Bank B. Both start and end with the same balance-sheet positions.
Scenario A has 5 steps:

• A1: Bank A exchanges reserves for cash. This is a refinance operation with the central bank's balance sheet (not shown).
• A2: Depositor α withdraws the cash. This is an asset disintermediation.
• A3: α pays the cash to γ in payment by assignment.
• A4: γ deposits the cash into Bank B, which is an asset intermediation.
• A5: Bank B exchanges the cash back into reserves (deposits at the central bank).

The payment takes place outside the banking system. Whenever depositors are making payments in this way, the reserves are just gone from the system.
It's more convenient for the banks to send the payment directly to the other bank instead of having depositors withdraw their money. This is scenario B.
Making payments directly through account balances reduces the need for depositors to withdraw cash. It allows banks to economize on reserves. Offering demand deposits, therefore, basically forces banks to run the payments system.
When appropriate, we can treat bank deposits as outside asset for our layer of the hierarchy simply by ignoring the balance sheets of the banks.

Part 4: Reading: Charles F. Dunbar

The reading for this Wednesday is a chapter by Charles Dunbar about how the United States checking system worked in the late 19th century before we had a central bank.
Below is a simple representation of payment by check between depositors at two banks at the same level of the hierarchy.
https://preview.redd.it/0ozi6korp24b1.png?width=901&format=png&auto=webp&s=3e879bf2b0a8134ccee9ecef03083a8adbfd2c0e

• Here's the full Dunbar book: Chapters on the Theory and History of Banking

Part 5: Correspondent banking, bilateral balances

A check is an order to pay. Each bank receives orders to pay throughout the day and then nets them out.
https://preview.redd.it/oblni8wup24b1.png?width=427&format=png&auto=webp&s=d9ad8403194efcbec07de0faf85591656125fb98
After they clear by netting out offsetting promises to pay, the banks could settle the difference by paying in reserves (transfer of portfolio). But it can be more convenient for the banks to have deposit accounts with each other. These are called correspondent balances.
There are two ways to resolve a payment from a bank A customer to a payment to a bank B customer using correspondent balances:

1. A liability disintermediation that contracts A's balance sheet.

https://preview.redd.it/t58zbfdyp24b1.png?width=555&format=png&auto=webp&s=bcc188add9fc1d79f01421f61ce08330dfb0acbe

1. A liability intermediation that expands B's balance sheet.

https://preview.redd.it/kzicxvt1q24b1.png?width=556&format=png&auto=webp&s=94667d88cb0aa2115148ea194c21346c1440dbae
In practice, there's a hierarchy of banks, and the small country banks will be the ones that hold deposit balances in the bigger city banks. The action will happen on the big bank's balance sheet.

• Here's Perry's source on bankers' balances by Leonard Lyon Watkins: Bankers' Balances

Part 6: Correspondent banking, system network

Here's a diagram similar to the one Mehrling draws on the board. Money-center Banks A and B have correspondent accounts at New York Bank C. Depositors α and β's banks have correspondent accounts at money-center Bank A. γ's bank has a correspondent account at Bank C, and λ's bank has a correspondent account at Bank B.
https://preview.redd.it/r3h8b2d5q24b1.png?width=960&format=png&auto=webp&s=8bab35d6ea48ec0b63c5cf48cee5105f5d5e7630
There are multiple layers of the correspondent-banking hierarchy. The idea is to economize on reserves. Do as much netting as possible so reserves don't have to flow. Use credit as much as possible so reserves don't have to flow.
Here's what it looks like (notionally) for α to pay λ.
https://preview.redd.it/vvp29757q24b1.png?width=1065&format=png&auto=webp&s=5ade9969f7e31d9af86dadbf688f4ceca1a69c5b
I've arranged the balance sheets so you can see the hierarchy. Each balance sheet uses as reserves deposits in the bank above it.
This flow of reserves is only "notional" because it might be offset with a payment going in the opposite direction. In that case, no reserves will actually flow.
Now imagine that λ has its correspondent account directly at money-center bank B. When α to pays λ, there is a contraction of deposits at an intermediate layer of the hierarchy.
https://preview.redd.it/wjjy913aq24b1.png?width=1058&format=png&auto=webp&s=381d71e0fda9255a354d106f0ecbfe8bcc0a5705
From the perspective of α and λ, it's all the same.

Note that, since the correspondent system is a credit system, we are not constrained by the quantity of gold, only by the various bi-lateral credit limits.—Lecture Notes

The accumulation of orders to pay throughout the day is not constrained by reserves. Only the final settlement (after netting) is reserve-constrained.

Part 7: Clearinghouse, normal operations

Banks cooperating to form a clearinghouse is an example of the emergence of hierarchy. The banks are installing a layer of the hierarchy above themselves for the purpose of providing elasticity. That elasticity can then propagate further down the hierarchy.
Here are some simple balance sheets showing the New York Clearinghouse Association.
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Clearinghouse certificates are notes that stand in for gold. They're not just promises to pay gold. Each note corresponds to gold that's actually held in reserve.
All promised payments are mutual obligations of members of the clearinghouse. The credit of the aggregate is better than the credit of any individual bank.
The clearinghouse is a credit system during the day but a money system when settling at the end of the day.
If a member bank is a net debtor at the end of the day, it has to choose from the following options:

1. Pay with clearinghouse certificates.
2. Borrow from another member.
3. Default.

The second option is what we call a money market. The money market is the market where banks borrow reserves from each other short-term to meet payments deficits. In addition to facilitating the payments system, the money market can also fund longer-term positions that need to be continually rolled over. We'll talk about this more in future lectures.
Here's a book about the history of clearinghouses that Merhling recommends.

• Clearing-houses: Their History, Methods, and Administration by James Graham Cannon

Part 8: Clearinghouse, private lender of last resort

In times of stress, when member banks collectively lack sufficient reserves, the members can borrow from the clearinghouse itself. The clearinghouse funds the loan by issuing a clearinghouse loan certificate. Whereas the clearinghouse certificate is directly backed by gold, the clearinghouse loan certificate is backed by the loan instead.
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The Clearinghouse is a private lender of last resort.
Clearinghouse loan certificates are like banknotes, but they're issued against member loans rather than the special 2% government bonds. Before 1907, it wasn't clear that they were legal.
Sometimes, it was hard for the clearinghouse to get the loan certificates back because they paid so well.
Here's a paper by the same author as the above book that describes clearinghouse loan certificates in more detail.

• Clearing House Loan Certificates and Substitutes for Money Used During the Panic of 1907 by James Graham Cannon

Part 9: Central Bank Clearing

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Central banking can be understood as nothing more than one step beyond the clearinghouse, a kind of regularization and strengthening of the clearinghouse system that goes the extra step of obliterating the difference between clearinghouse certificates and clearinghouse loan certificates.—Lecture Notes

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In the above set of balance sheets, "money" is an umbrella term for reserves (deposits) and Federal Reserve Notes. It shows that the Fed can support members by lending to them through the discount window (not the same thing as discounting) or by buying assets from their balance sheets (more analogous to discounting).
Today, there are two clearing systems: one public (Fedwire) and one private (CHIPS). CHIPS is the modern version of the NYCA. CHIPS clears first, and then everything settles on Fedwire.

Part 10: Central Bank Cooperation

If someone above you in the hierarchy needs to be paid in reserves (external drain), your choice is to pay up or to default (suspend payments). If someone below you in the hierarchy needs to be paid (internal drain), your liabilities are their reserves. You can expand your balance sheet. No problem.
When you're a central bank and you run out of gold, you suspend specie payments. That's suspending the exchange rate fixed with gold. It suspends the promise that you will maintain the mint par with gold.
Instead of suspending payments, it's possible for all the central banks to expand their balance sheets at the same time when experiencing stress. It's like an international clearinghouse adding elasticity at the top of the system.
In 2012, the five central banks that matter were all expanding their balance sheets together: Fed, ECB, BoE, SNB, and BoJ. Today, Mehrling adds the Bank of Canada to that list and calls them as a group the C6, with the C standing for "central bank."
Please post any questions and comments below. We will have a one-hour live discussion of Lecture 5 and Lecture 6 on Monday, June 5th, at 2:00pm EDT.