by Bill O’Grady | PDF

In Part I, we discussed the metaphysics of money.  This week, we will examine the current structure of money and the potentially complicated impact of CBDC.

The Current Structure
Here is a Venn diagram of the current structure of money in most developed markets.

First, there are two forms of money that are electronic only—reserve money and bank account money.  Reserve money is part of the monetary base and it is money that banks “hold” at the central bank.  Only banks can access reserve money, or, put another way, only banks have direct access to the balance sheet of the central bank.

Bank account money is money held in household or firm bank accounts.  It is mostly created by banks through the lending process.  The central bank issues two forms of money—cash, which is an anonymous bearer instrument, and reserve money.  Finally, cash and bank account money are held by anyone, therefore they are universally accessible.

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