Discussion — Lectures 5 & 6

This session covers Lecture 5: The Central Bank as a Clearinghouse and Lecture 6: Federal Funds, Final Settlement.

• Lecture 5 Notes
• Lecture 6 Notes

Lecture 5 describes the interconnectedness of bank balance sheets that allow the payment system to operate smoothly. The hierarchical structure of the US payment system emerged in the form of correspondent banking, bank cooperation, and the evolution of a clearing house into a central bank. The central bank helps knit the payment system together to make it approximate the behavior of one big bank.

Lecture 6 begins our discussion of the money market. Today, the Fed Funds corner of the money market is largely vanished, but the insights from this lecture still apply. Just as clearing house members borrowed from each other to settle at the end of the day, the money market allows the payment system's deficit agents to find surplus agents who can help them meet their settlement constraints. Additionally, money markets also provide a flexible source of funding for longer term investments. We describe all of this using balance sheets.

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