Are the following true?

  • m0 is only created by destroying something else (federal reserve deposits)?

  • m0 can be created as a loan?

Related questions: can something other than federal reserve deposits be exchanged for m0? what happens to the FRD, they get destroyed?

  • $\begingroup$ If M0 is notes and coins outside the central bank, then increasing it without doing something else to offset this certainly does increase the money supply. $\endgroup$ – Henry Apr 28 '20 at 0:12
  • 2
    $\begingroup$ The title of the question bears no relation to the contents. I cannot parse “ m0 cannot be loaned out without exchanging a pre-existing asset?”. Also “ As far as I understand m0 does not increase the money supply” is incorrect. This question needs to be be cleaned up before anyone can answer it. $\endgroup$ – Brian Romanchuk Apr 28 '20 at 2:20
  • $\begingroup$ @BrianRomanchuk “ m0 cannot be loaned out without exchanging a pre-existing asset?” would just mean: 'can m0 be created as a result of a loan' like the title. $\endgroup$ – user3181821 Apr 28 '20 at 11:33
  • $\begingroup$ @BrianRomanchuk I got that creating m0 does not increase the money supply from economics.stackexchange.com/questions/8320/… $\endgroup$ – user3181821 Apr 28 '20 at 11:35
  • $\begingroup$ I didn’t see anything that says that. M0 is part of any money supply aggregate. I changed the question to eliminate problematic text. $\endgroup$ – Brian Romanchuk Apr 28 '20 at 12:44

M0 are notes (e.g. dollar bills in the US) and coins Held by the public. It seems likely that almost all the notes and coins come from the public withdrawing them from banks.

Banks get the notes and coins via exchanging settlement balances at the Federal Reserve (“reserves”) for them, which are put in vaults for distribution.

The only alternative is for the Federal government to directly pay out notes and coins, which is possible, but this does not appear to be common practice.

If we ignore that alternative creation mechanism, we can answer your questions.

Firstly, an increase of M0 is reliant on the public withdrawing notes and coins from a bank. This is only possible if the bank has notes and coins in its vault, so this process is limited. In order to be sustained, the vaults need to be replenished.

  • Yes, banks need to exchange reserves for notes and coins.
  • A bank could borrow reserves from another bank or at the discount window to get vault cash, but those are two transactions.
  • Settlement balances are destroyed when exchanged for notes and couns.

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