Book contents
11 - The Payments System
from Part II - Banking
Summary
WE EXAMINE IN this chapter the role of banks in clearing private debt and the ways central bank policy may help or hinder banks in their role as clearinghouses. We have seen in earlier chapters howfiat money may be used to help people purchase goods. In reality, goods are not only purchased via a cash payment at the time of the transaction but also with a promise to pay at a more convenient time in the future. A purchase by check is an example. A merchant accepting a check receives final payment only when the shopper's bank honors the check. It may honor the check by sending fiat money in the form of reserves to the merchant's bank, which then credits the merchant's account. Alternatively, if the shopper's bank also possesses a positive balance of checks from accounts at the merchant's bank, it may simply subtract the amount of the check from this balance.
In the United States, an average of $2.6 trillion is cleared each day by the combination of Fedwire and CHIPS, the payments clearinghouses run, respectively, by the Federal Reserve and the New York Clearinghouse Association (Bank for International Settlements, Statistics on Payments Systems in the Group of Ten Countries, Basle, 1998.) Obviously, clearing the checks of shoppers is only a small part of the need to settle debt. Settlements of debt from trading in securities and foreign exchange markets account for much of this volume.
If the exchange of fiat money for the clearing of debts always worked seamlessly, there would be little interest in studying it. There are signs, however, that impediments to the smooth clearing of debt may exist.
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- Modeling Monetary Economies , pp. 200 - 213Publisher: Cambridge University PressPrint publication year: 2001