[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

the banking system as a whole remain unchanged. The money multiplier goes to
work only when “outside” funds, in particular those from the Federal Reserve, are
used for the bonds.
The process works in reverse when the Federal Reserve sells some of the government
securities it holds. If the Fed sells $1 million to a bond dealer, the dealer pays
with a check drawn against its account at its bank, NationalBank. The Fed
presents the check for payment to NationalBank and deducts $1 million from
NationalBank’s reserve account. The total amount of reserves in the banking system
has been reduced by $1 million. This change in reserves then has a multiplied impact
in reducing the money supply and bank credit.
The Open Market Desk at the New York Federal Reserve Bank conducts the
Fed’s open market operations. But you might be wondering where the Fed gets the
money to purchase government securities in the first place, especially since purchases
(or sales) on a given day might amount to more than $1 billion rather than
the $1 million of our example. When the Fed credited AmericaBank’s reserve account
for $1 million to settle the check it had used to purchase bonds, the Fed simply made
an electronic entry in its bookkeeping system. In effect, it created the $1 million in
reserves out of thin air! And when it sold government bonds and deducted $1 million
from NationalBank’s account, the reserves were simply gone.
Discount Rate Changes The Federal Reserve has another tool it can use to
affect the level of reserves. Banks can obtain reserves by borrowing them from the
Federal Reserve, which lends at an interest rate called the discount rate. By altering
it, the Fed can influence how much banks borrow. When the Fed increases
the discount rate, banks find borrowing reserves more expensive; they therefore
borrow less and the total level of reserves in the banking system falls. If the Fed
lowers the discount rate, banks will borrow more and the total level of reserves will
rise. The discount rate is the only interest rate directly set by the Fed; all others are
set in the market, by the forces of supply and demand.
Internet Connection
THE FEDERAL RESERVE BANKS AND INTERNATIONAL
CENTRAL BANKS
Each of the regional Federal Reserve banks maintains a Web
site that contains a variety of useful information related to
monetary policy and general economic conditions. The Web
site of the Board of Governors of the Federal Reserve System
provides links to all the regional banks at www.federalreserve.gov.
The Bank for International Settlements in Basel, Switzerland,
lists links to ninety-six central banks in countries around
the world, from Albania to Zimbabwe. These can be found at
www.bis.org/cbanks.htm.
THE FEDERAL RESERVE ∂ 629